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The Easy Secrets To Determine Stock Market Position Sizing
By: David Jenyns
When trading in the stock market, position sizing is where all the tools of
money management come together. It`s perhaps the most important part of your
stock market money management rules. Position sizing is simply deciding how much
you are going to put into any one stock market trade. You can calculate your
position size using the other tools of stock market money management, your
maximum loss and your stop loss.
However, many stock market traders believe that they`re doing an adequate job of
position sizing by simply having a stop loss in place. While this will tell them
when to get out of a stock market position, and will, with a maximum loss,
determine how much capital they`re risking, it doesn`t answer the question of
how much or how many units they can buy.
If you have already calculated your maximum loss and your stop loss, you can
take these values, and plug them into a formula that will calculate how many
shares you can purchase without exceeding your maximum loss. Although it is
simple, the formula I`m about to give you is extremely powerful. The number of
shares for your position is equal to your maximum loss divided by your stop loss
size.
You`re already familiar with what a maximum loss is; but may not be recognize
the term stop loss size. A stop loss size is the difference between your entry
price and your stop loss value. If you were to enter the stock market with a
one-dollar trade and set your stop loss at 90 cents, the stop loss value would
be the difference between your entry price and your stock price, ten cents. Once
you`ve entered these values into the formula, you can calculate how many shares
you should buy so that you never risk more than your maximum loss.
Let`s look at how the formula works in practice. If your trading float was
$20,000, and you were risking 2%, your maximum loss would be $400. If your stock
market entry price was one dollar, and your stop loss value was 90 cents, your
stop size would be ten cents. Now, the number of shares is equal to your maximum
loss divided by your stop size. In this example, you can purchase 4,000 shares.
If this stock reaches your stop loss, and you have to exit the position, you
know you`re not going to risk or lose more than 2% of your float, which is $400.
This formula ensures the safety of your trading float. A little finessing that
some of my clients like to do is to class their brokerage fee as part of the
maximum loss. You could do this by subtracting the stock market brokerage fee
from your maximum loss. If the stock market brokerage fee was $40 for your
return trip, subtract 40 dollars from your maximum loss. Instead of entering
$400 into the formula, you`d now enter $360. Once this is computed out, you can
determine how many shares you`d buy, and know that you had included brokerage as
part of your maximum loss.
By setting your position size so that you follow the 2% rule, you`re using a
strategy that will limit the size of your losses during losing streaks. When you
experience a winning streak, your position sizes will grow in a similar manner.
By changing the amount of capital you`re deciding to risk, you`ll change the
characteristics of your risk to reward ratio. All of your stock market money
management rules will work together to make your trading system as profitable as
possible.
About the Author:
Discover BIG profits from the market by downloading your FREE copy of David's
new Ultimate Stock Trading Systems course. http://www.ultimate-trading-systems.com/forex.htm |
