Over the weekend I received an email from someone telling me that they were saying trading the VWAP doesn’t work.

They came to this conclusion because they made one trade on TSLA on Friday and it blew up their account.

This, of course, should be a learning moment for anyone who’s ever wanted to day trade.

You should NEVER let one trade blow up your entire account.

We talk a lot about risk management here.

And I cannot stress enough how important it is to define your risk going into a trade.

So, let’s look back at Friday and see where things could have gone wrong with TSLA.

Let’s say that you shorted Tesla at the beginning of the day as noted in the white circle in the graph below…

Maybe you missed the first move down and you shorted it just below the VWAP at $128.50.

When you did this, you would have wanted to immediately set two stops: one just above $128.75, and then all the rest of it if it broke $129.00. Whole numbers here determine your stops, but previous candles and pre-market entries can as well.

Those are theoretical stops and some people like having tighter stops or are looser with theirs. You should get used to knowing what your risk aversion is, and plan your stops ahead of time going into any trade.

You define your loss before you even think about making a profit.

If you shorted it at $128.50, you certainly would have wanted to cover some when it was heading past $127.50 at 9:35.

That’s a dollar move which is a quick $100 on 100 shares of TSLA.

But of course, later that morning, 10 minutes later, the stock chopped around the VWAP and the bears and bulls were fighting until the bulls finally won.

The stock ripped upwards at 9:50, and if you had set your stops in place ahead of time, you would have either come out even or with a small loss.

But you hear what I just said? A small loss.

You already should have been taking some profits, and maybe would have risked a dollar to make two or three.

But Kenny, what does this have to do about how many shares of a stock I should buy?

Well, it would be terrible of me to not answer that question, as it is the title of this article.

As a said before, everyone’s risk tolerance varies.

But a good rule to start using is the 2% rule.

The 2% rule means that the maximum loss that you should risk per trade is 2% of your total account.

It seems low, but if you step back and think about it, it makes sense.

If you have an account funded for $5,000, the maximum amount you’ll want to risk using this rule is $100 loss per trade. For a $25,000 account, your risk is $500. $50,000 is $100, and so on and so forth.

To calculate it quickly, just divide the amount of money in your account by 50 to get your number.

That means that you would need to have 50 losers in a row to empty your trading account.

If you were trading without any backup, I could see that happening, but with the VWAP and defining our risk ahead of time, we can always know how much we are risking.

Remember, the 2% rule is a baseline, and you can determine your own risk.

But also remember that this is a baseline that is an industry standard that many professional traders out there use.

You should never be caught out with the possibility of a loss that will ruin months of hard work on your account.

So how many shares should you buy of a stock? Don’t think of it of how many shares to buy, but rather what your defined risk on each trade is.

Buying less of a stock and allowing yourself the flexibility to set several stops can help you get used to managing risk for your personal account.

Finding a sweet spot to where you trade within your own risk tolerance can help you get in a groove of how much you can risk.

VWAP trades work, but some work better than others.

And if you’re on the wrong side of a trade, that happens. It’s not a big deal because there are plenty more opportunities in the future for you to make money off of VWAP breaks.


Leave a Reply

Your email address will not be published.