The big gains and big risks come from focusing on a few stocks. But that is your optimal number of stocks to invest in (end of day)? I knew a guy who only invested in one at a time..Made a ton of cash (millions) but then lost half of it. I guess it is gamble.....but one that can pay off big IF you are lucky. Personally I invest in 5 at a time. Or I should say I divide my account into 5 and look for opportunities. I have suffered the odd gap down but I take it on the chin. I guess if I was manging OPM I couldn'r be so focused. But it's the only way I get the gains I do. And you?
I have done some testing with this and found that fewer stocks generate greater return, but more stocks produce a smoother equity curve. Both are good, depending on your preferences. Other traders have confirmed this.
I have a short-term system that I tested with 2 through 8 stocks at a time. The changes in returns were substantial and linear based on number of stocks, though tests all were profitable.
2 i think is too risky....if you get a gapper you are looking at a big loss. 8 is quite widespread......and gaps wouldn't hurt you. I think somewhere in between is good: 4-6 Can you share those results? What kind of drawdown did two at a time give you?
My tests with number of stocks only recorded total return. In my experience, my worst hits were loss per stock in the order of 1-2% of the entire account (e.g. $1-2k on a $100k account). Usually all the stocks move together, up or down.
I had 10 open positions in live accounts, but am now moving back down to 5. Better to be a little conservative right now. I have also tested strategies with various numbers of positions (everything else being equal) and higher was definitely more profitable. I have no exit conditions, but if things really tank, I'll get a margin call.