Position Sizing

It's a good idea to have a plan ahead of time for position sizing. The reason is because it can have a big impact on not only your profit, but also your risk.

If you take too big of a size on each trade, then a handful of losses may topple you over and take you out of the trading game altogether. And I'll tell you right now: there will definitely be periods where you take several losses in a row! It doesn't mean that you can't make a bundle of money with these stock picks and trading strategies. It means you have to size your positions properly to ensure you get the benefit without getting blown out. Living through the drawdowns is a key to making the most of these trade alerts, so you want to have position sizes that you will be able to tolerate during strings of losses.

My Position Sizing Preference

For all my trades (and all my quantitative back tests), I use a very specific compound position sizing approach. It's the way to get the best bang for my buck on position sizing.

For subscribers I have a built-in calculator on the site that shows how many shares or contracts my position sizing approach calls for on any given trade. For stocks, I typically risk 1% of my account value on each trade. For options it's 5%.

Watch the video below to get a better understanding of how I determine the amount of shares or contracts to buy for each alert.

If you want to mimic my position size, then each time you see a new trade of mine, you can input your account balance right on that page and it will show you how many shares or contracts I would trade if I had the same account balance as you.

Note that when you input your account balance, this should be your entire account balance, not just the cash available. (This is only assuming that you're comfortable using the entire account balance for trades of this risk profile. I have a dedicated account for these trades, so I put my entire account balance.)

IMPORTANT: you can trade whatever position size you want! Everybody has different risk preferences. You can dial your position size up or down as much as you want according to your risk preference.

To learn more about the historical risk that my position sizing strategy exhibited, check out the drawdown information from my stock research.

Another Choice?

Many people buy the same amount of shares no matter the stock. They might buy 100 shares every time for example. That doesn't suit my risk preference, but I agree it's very simple and fast.

Some others want a fixed dollar amount for each transaction, so they buy say $1000 of stock for each trade no matter which stock it is. That's ok too!

There are two key downsides to taking a simplistic position sizing approach like either of those two examples. One is that you don't get the benefit of compounding growth, which is a big deal! The other is that you are more exposed to volatile results because each trade is weighted differently relative to your account balance. If you tie your position size to your account balance like I do, then you're taking tight control of your risk and potential results for each trade (which could lead to more stable results).

You can handle the position sizing whatever way you want. It's totally up to you. I just wanted to make sure everyone knows exactly how I'm calculating my own sizing so that you have the option to mimic my approach. If you want to take a different approach, you can consider this stock position sizing calculator.

If you have questions about position sizing, I am ready for you! Contact me and we'll talk about anything you want.