Market Breadth and Account Risk

There are four account sizes I trade with: 0, Quarter, Half, Full+.  Based upon my assessment of market breadth and trading conditions I will decide how much of the account will be in play over the upcoming week.  If the trading conditions on my time horizon are not conducive I will go in with 0.  If things are humming I will go into the week with full trade size and possibly margin.  These conditions are fairly easy to assess based on overall expansion of contraction of stocks.  In between is a bit more art meets science.

For example:  If stocks are in a deep correction and I'm not trading but there is a breadth flip, I'll look to enter with 25% account size where four positions is generally risking 1%;  should things improve and trades work out, then bumping up to 50% account size would risk 2% of account with 4 open trades.  I allow breadth to determine the expansion and contraction cycle of account at risk.

Currently upside momentum is moving into a waning phase.  Upside moves are muted and contracting while down side moves have shown some expansion and acceleration.  This is a situation in which I would be looking to pare down account size at risk and move into the 25% quadrant.


Since peak exuberance on the first of July, stock moves across a number of metrics have been waning and beginning to invert across multiple time horizons.

Monthly Exuberance

In conjunction this can be visually confirmed with the number of stocks above their 20 period moving averages declining.

>20MA Declining

The number of stocks making new highs across multiple time horizons is hovering around a net negative zone.

New Highs / New Lows

There is a decline in the stocks within the trading universe.

Trading Universe

Muted moves across the time period positions are held for.

Holding Period Decliners Expanding

The combinations of these factors suggest that the margins within which I trade have thinned and account risk is increasing.  One way to mitigate account risk is decreasing to a 25% risk profile until more favorable conditions are present.