Understanding the Infeasibility of '1% Risk to Equity' and Benefits of High ADR% Securities
I’d like to clarify why aiming for a 1% risk-to-equity ratio is often unrealistic due to position sizing constraints. I’ll also compare lower ADR% products, like $SPDR S&P Retail ETF(XRT)$ at 1.41% ADR, with higher ADR% products, like $Direxion Daily Retail Bull 3X Shares(RETL)$ at 4.06% ADR (a 3x leverage of XRT, sharing the same price structure on intraday timeframes).
In the example below, I simulate an entry price and stop-loss price based on XRT and RETL high and low range and automate the calculation of position size % required for a “1% risk” approach relative to account equity (excluding existing unrealized gains/losses of other positions).
Using a 1% risk model, you would need to allocate almost your entire account (without margin) to XRT and about 30% of your account to RETL with its higher ADR%. The 1% risk approach may work for traders constraining themselves to securities with ADRs above 5%, as structuring trades based on high/low intraday ranges often only requires 10-25% of equity, enabling a minimum of four concurrent positions on swings.
However, with names like $Tesla Motors(TSLA)$ $Microsoft(MSFT)$ $NVIDIA Corp(NVDA)$, even synthetic leveraged of those names like $Direxion Daily TSLA Bull 2X Shares(TSLL)$ $T-Rex 2X Long MSTR Daily Target ETF(MSTU)$ $Direxion Daily NVDA Bull 2X Shares(NVDU)$ wouldn’t allow for comfortable positioning. This is no secret if you have the right metrics on your spreadsheet.
I suggest starting with a 0.15% risk per trade, increasing only when you begin to see the benefit of having a ADR% cut off in your screening and share structure of higher ADR% securities.
Personally, I max out at around 0.33%, especially when most active names now are in the 2b-25b market cap range, with floats below 50 million shares and ADRs above 4.5%. This are the trademark of momentum names, and it make alot of sense why are able to move in such rapid fashion on those share structure.
I just wish to add that High ADR% securities offer the benefit of greater intraday range expansion without substantial capital lock-up compared to lower ADR% names. I avoid trading products like XRT or TSLA directly, preferring leveraged ETFs when they provide sufficient liquidity for the same reason. It gives you alot of capital excess when a 5-star/A-rated setup in the latter stage of your position building.
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