AMZN Follow Up

I posted a follow up on a core short position, AMZN in which I not only said I like the general area, but added...

"I may add to the AMZN short "if" I can get a little upside price concession to make it a better entry, but that's because I already have a largely filled out position in place."

Just as I said earlier, "Today is a gift", AMZN seems like it is prepared to make good on that gift I would be looking for to add to the equity short position.

Here's today's updated charts.

 Yesterday's post explains the macro fundamentals of the trade, "Above $300, etc.".

Here we have what technical traders will accept as a "Bull flag" and they are still bullish, still buying the dips.

This could also be taken as a Bullish candlestick  consolidation pattern called, "Rising 3 Methods".

All of the bodies are inside the one large candle so this qualifies and volume works for either set up so I'm guessing this is very visible to technical/retail traders.

 The big picture or "Why I'd want to be longer term short AMZN" is right here on the 2 hour chart and others and still perfectly intact.

The psychological price area of $300 is under the belt as well, it's just a matter of a tactical entry, the strategic view looks to be all sorted out already.

So if we are looking for a bounce to the upside, this 5 min AMZN chart seems like it has enough of a positive in place to do that.

My best guess is that AMZN may end up around the top of the channel around or nearby the $310 mark, but even at $310, we're only talking about a 3% difference.

If I were to use the 2% rule and say I had a portfolio of $30,000, then I'd have 2% risk per position (as long as I don't have 10 or 20 open positions at once), then my risk capital for the position would be $600.

***Keep in mind, this stop example is taking in to consideration I have some exposure to AMZN right here and I'm trying to add to it, it's far from a perfect example, but it may give you some ideas. Obviously if you can enter at a higher price, your stop can be lower and you have less risk which allows for more shares, but you don't want all of your eggs in one basket which is easy to do with the 2% rule and a tight stop.


Assuming I put a stop at $320 (not at exact whole numbers or anything else that is obvious), I'm looking at just above 6% risk on the position or about $19 risk per share which is not unreasonable at all for a new position.

So of that $600 in risk capital (I'm not including transaction costs because I'm assuming they are limited or slippage) with $19 risk per share, I can afford 31 shares, call it 30. That's about $9,000 which is 30% of my portfolio, that's about twice as large as I'd prefer (maximum single position no more than 15%), so it would be 15 shares until I can lower my risk.

This is a general example, the size of the portfolio, what you're willing to risk per position (this is because of gaps) and how wide you want your stop will all determine the real number, by the way, the new site will have a risk calculator for you to use quickly with your own data.

I have this one layout that determines a stock's maximum gap over the last year or two and sometimes I'll use that to determine my maximum risk as the overnight gap is the hardest to protect against.

 For AMZN the largest gap was $28.84 in May of 2012, that's a lot...

There's the gap in red, but the gaps to the left in white look like they're much higher probability so I check those out and get..

$17.60 which is VERY close to my initial $19 stop.

This isn't a perfect science, but perhaps these will give you some ideas to tweak your risk models.

The other way is to go with a much tighter stop, but you still run in to the "15% of portfolio" rule as a tighter stop will only allow for more shares to be bought.