Positions, Risk, and Buffets

You don’t want to have too many active positions open; it’s like eating too much food at your favorite buffet. Buffets can be good. Buffets can be very good. However, you almost always–or at least I do–walk (if you still can) away from a buffet in pain–sometimes in a great deal of pain. I like the illusion that I have control over myself around food, but that disappears as soon as I see a soft serve ice cream machine paired with caramel and hot fudge pumps. There’s this mode that I enter when I’m in a buffet. I become this mindless food eating machine that inhales plate after plate of mediocre greasy food just because I can. Forget the fact that I’ve been working on not eating carbs for the past three weeks, I’m have four or five rolls with honey butter.

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Did you know that Apiary limits the number of open or pending trades you can have? This isn’t an all-you-can-position buffet, and for good reason! Apiary limits the number of open trades or pending orders in an account for risk management purposes. Mainly because during extreme market conditions, slippage is of serious concern; a lack of liquidity on either the buy or sell side means orders may not be filled before slipping far beyond any stops. By limiting the number of pending or open positions, Apiary can better manage risk across the entire portfolio. Mitigating risk is beneficial for us as a company, and for you as a client.

In addition to Apiary’s risk management model, limiting the number of open positions is a good practice at the personal level. One argument for multiple positions is the benefit of diversification.  However, after about 8-12 open positions, the benefit can become incrementally smaller and can actually turn negative.  For example, a trader actively managing 100 open positions is far less effective than a person managing 10. In fact, this is one of the ideas that helped found Apiary! It’s far better to have a group of ten traders individually managing ten positions than to have one person managing 100. In the end, the same number of active positions are being managed, but with far less risk.

Happy Trading!

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