How I calculate position size | stockbee


How I calculate position size

In the post Understanding the maths of swing trading I discussed the basic concept of how swing trading returns are generated and the number of trades required to double. The number of trades required is a function of your trading style. Some traders shoot for higher per trade rewards , so they will have less number of trades. As against that a scalper might shoot for very small target and will require large number of trades.

The number of trades required is also a function of % of your trades that are profitable. Best of the traders in the industry will tell you that 50% win rate is considered good enough and you can make money with even lower number of win rate if your R/R is very high. For example trend followers have success rates of  just around 30%, yet  they make money as they  have high R/R.

In order to calculate how much share to buy for a given R you can use the following calculator:

Let us say this is the stock I want to buy and I want to risk 1% on this stock which showed up in Stockbee Dollar Breakout scan. Let us assume entry at close of Friday at 95.67 and stop at low of entry day at 91.41. If you plug in these values in the free Stockbee Trade Size Tool , you will see that you need to buy 234 shares for 1% risk. At 1% risk 22457 or approximately 22.5% of your portfolio will be invested in this one trade.

Let us say this stock makes a 10% move from here. Then you will have a profit of 2245 USD on this trade. Which gives you 2.2 /1 risk to reward.

In above example closer is your stop to the entry more of your capital will be invested in single trade. Let us say instead of 91.41 you put your stop at 94 then with 1% risk you will have 57% of your account in one position. As shown below:

This is one of the ways to size your trade. The advantage of this kind of position sizing is that you will control your risk efficiently.

Some people use fixed position sizes. Say they might decide to hold 4 positions at any time and will allocate 25% each to it. That may be convenient way to do it but can be inefficient way to do it.

Another rule which many people follow is to restrict the maximum amount you would put in a trade. So they will not exceed any position amount above 25% of their capital. That is a very sound rule from a risk management point of view. So in above example even though the risk calculator shows 57% you should invest in the trade, you will override that and put only 25% of your capital. As a result your trade risk will be lower.

Every trader has different risk tolerance. Some are heavy risk taker and put big chunk of their capital in single trade. If it works they will have less number of trades to achieve their objective. At other spectrum some trader focus a lot on reducing risk per trade and as a result need to have more trade opportunities to make same returns.

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