Position Sizing

By: ShortMeTina

Position sizing is something I reference to often when talking about my trades.  It’s different for everyone.  That is, if you ask 20 traders about position sizing; you will more than likely get 20 different answers. 
So, I am not here to debate what’s the better approach.  Although, I would like to hear your thoughts behind it (drop your comments at the end of the article)
At any rate, I see position sizing as a necessary nuisance (there are times I want to put 100% of my money behind a trade-but I wont) to trading survival.

Allocation to any trade range from 1%-10%.  I can’t envision a scenario where I would put more than 10% of my money in any one trade.  (google search Enron and Lehman Brothers to see why I hold this view).  A hard-stop cannot stop everything!
 
So, knowing a hard stop can’t stop everything, I want to ensure that if I so happen to wake up and find that a stock I am holding is trading for pennies; worst case scenario, I would have lost 10% of my account value.  A tough loss to deal with but guess what, I will live to fight another day.

(Example:  My trading account is $100,000.  I allocate no more than 10% or $10,000 in any one trade.  Worst case scenario is I lose $10k!  Yes a blow to my account but I still have $90k to work with)

This brings me to another point.  10% allocation is generally reserved for established companies.  Ya know, the ‘safe’ ones that have a proven business model, have been around for a bit and well, are safe. 
1% allocation is reserved for companies that don’t fit that mold.  I call these stocks my ‘speculative’ trades.  These are either penny stocks, money losing cult stocks, or bubble stocks (think Bitcoin, Tesla, etc).  1-3% ensures that I make ‘some’ money as these stocks tend to appreciate quickly.  Unfortunately, these stocks are volatile and are also subject to crazy swings.  The small allocation allows me to stay the course w/ the massive downside swings.  I wouldn’t be able to hold a 10% position in a stock that can shed 30+% in less than a week.  I can stomach such a swing if I had less than 4% of my money on the line!

(Example: My trading account is $100,000.  I am investing $1k-$3k in Bitcoin (which represents 1-3% of my account).  $3k is the MAX.   If I invested at the beginning of the year; I would have anywhere from $8k-$24K. 
Clearly hindsight is 50/50 or is it 20/20?  Anyway, point is; bitcoin could have easily crashed.  And if it did, I would have walked away with minor scratches.  Max draw down would be $1k-$3k, which would leave my account at $97-$99k). 

4-9% is everything in between.  Outside of the above mentioned, I tend to allocate percentage based on my confidence level in the trade,  the company and overall market conditions. 
 
That’s it! 

1-3% for stocks that can go up or down 50-60% in a short time frame (speculative picks). 
10% for stable companies that continue to show signs of growth and stability. 
4-9% for anything in between those two spectrum. 
 
This is how I approach the markets, it might be different for you and that’s okay.  Just make sure you’re around to trade another day.  I know I will be.

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