How large or how small should your position be in any given trade? Prior to I get into the answer to that, there is one prerequisite that supersedes everything, the liquidity of what you are looking to industry. You need to maintain your position size to as small of a percentage as the average daily money volume. You may estimate the average money volume by taking the price and multiplying it by the average quantity of shares bought and sold daily. If the stock that is trading at $1 averages among 100, 000 and 300, 000 gives, the average money volume level is probably in the ballpark of $200, 500. How much of the average money volume do you want to be? The less the better, but there is not any official threshold to stay under. I had created say staying under 2% is pretty safe, but if you know very well what you're doing you can push that somewhat. There have been plenty of trades where I've gone well over 2%, but in those cases if I didn't get buying momentum to sell into, I paid the price.
As long as you possess the liquidity issue covered, here is how I determine my position size. To start with, I need to know a few things to pennis find out what my position size should be. Those are; How much I'm willing to get rid of on this trade, where my entry is, and where my stop loss is at. For instance , say I'm watching a stock that is an uptrend, but it's currently falling to support at $1. Because the longer term trend is upwards, I'm looking to buy into the support at $1, but if that support fails to keep, I'm going to bail. The most I want to risk losing on the trade is $200. That doesn't mean my position size will be $200 worth of stocks, that means that should my stoploss get induced I want to00 lose $200. So my entry is at $1, and my stop loss will be enough below that to allow for normal market variances, we'll say at dollar. 95. So now I know all the factors to determine my position size. My maximum risk is going to be $200, the entry reaches $1, and the stoploss is at $. 95. Depending on that, my position size would be four thousand shares. 4000 shares multiplied by $1 is $4000, and 5% of that (which is what my stop loss is set at) is $200. An easy way to figure this out there is by dividing your maximum risk amount by the percentage of the stop loss. In this case, it would be $200/ 5%, which would give the $4, 000 figure. You then simply need to factor how many shares you can buy with that amount.
If you always risked the same amount on every trade and held an arbitrary percentage for your stop losses, your position size would always be the same (in dollars). My problem with this is that an arbitrary percentage doesn't make sense to me since all stocks and chart are different. The stock and the chart should dictate your stop damage. A 5% stop may work great on a single stock, but on another much more volatile one it may get triggered way too easily. If you feel that on a certain trade you desire a 10% - 20% stop loss because of either the volatility, where the nearest, most relevant support/resistance is at, or both, then use that wider stop, but change your position size accordingly. That way, you're still allowing the proper amount of buffer room for price changes, but you're still risking the same amount if your stop gets strike.
As long as you possess the liquidity issue covered, here is how I determine my position size. To start with, I need to know a few things to pennis find out what my position size should be. Those are; How much I'm willing to get rid of on this trade, where my entry is, and where my stop loss is at. For instance , say I'm watching a stock that is an uptrend, but it's currently falling to support at $1. Because the longer term trend is upwards, I'm looking to buy into the support at $1, but if that support fails to keep, I'm going to bail. The most I want to risk losing on the trade is $200. That doesn't mean my position size will be $200 worth of stocks, that means that should my stoploss get induced I want to00 lose $200. So my entry is at $1, and my stop loss will be enough below that to allow for normal market variances, we'll say at dollar. 95. So now I know all the factors to determine my position size. My maximum risk is going to be $200, the entry reaches $1, and the stoploss is at $. 95. Depending on that, my position size would be four thousand shares. 4000 shares multiplied by $1 is $4000, and 5% of that (which is what my stop loss is set at) is $200. An easy way to figure this out there is by dividing your maximum risk amount by the percentage of the stop loss. In this case, it would be $200/ 5%, which would give the $4, 000 figure. You then simply need to factor how many shares you can buy with that amount.
If you always risked the same amount on every trade and held an arbitrary percentage for your stop losses, your position size would always be the same (in dollars). My problem with this is that an arbitrary percentage doesn't make sense to me since all stocks and chart are different. The stock and the chart should dictate your stop damage. A 5% stop may work great on a single stock, but on another much more volatile one it may get triggered way too easily. If you feel that on a certain trade you desire a 10% - 20% stop loss because of either the volatility, where the nearest, most relevant support/resistance is at, or both, then use that wider stop, but change your position size accordingly. That way, you're still allowing the proper amount of buffer room for price changes, but you're still risking the same amount if your stop gets strike.
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