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Position Size

Position Size
I think this is a topic that some people fail to discuss and I just wanted to bring it up real quick possibly to benefit some people who may be struggling with this issue (at times myself included). 

Having position sizes in your portfolio that are not too large that you can be comfortable with is an integral part of your success as a trader.  Having too large of a position size can make you overly emotional which causes you to exit (or even enter) a trade at the improper time.  Even at times too little of a position size can cause apathy.  When I started trading (somewhat knowing about TA) a made the mistake of allocating large portions of my portfolio (1/3 to 1/2) to each position.  This was a huge mistake.  I oftentimes found myself panic selling during shakeouts selling during lulls (coincidentally right before breakouts of course) and quickly locking in micro gains because I didn't want to give up since the position was worth such a large proportion of money which I was uncomfortable with. 

This site has a great system which incorporates a 10% rule in its portfolio.  This means that you allocate 10% of you portfolio to any one position.  Think about it do you ever enter a stock with the plan that you will stop out after the position loses more than 10% Not likely (or you shouldn't).  Let's assume a loss of 10% as your absolute maximum loss on any particular stock.  (As a side note designating some arbitrary percentage i.e. 5% is a bad idea over using technical analysis methods.  Please use TA).  If you are using the 10% rule 10% of 10% is 1% which is in theory the maximum amount of your portfolio you will lose on any trade.  That is a safe strategy.  Take 1% of your portfolio right now; would you be ruined losing that amount of money Of course not.  This should be a comfortable amount for you.  If you lose it you live to trade another day and you can try again tomorrow and keep plugging away. 

When I see posts on this board about people distraught over their positions that are going against them I cringe and hope they are not overburdening themselves with position sizes they are uncomfortable with. 

By choosing a position size that you are comfortable with you can utilize all your tools as a trader and perform with maximum efficiency.  You inadvertently put a strain on yourself with large positions which emotionally complicates a proper trading strategy. 

This commentary was written by and is courtesy of Chris Guthrie CmanG Member of STHQ since Dec 2003.  Thanks Chris for a great commentary from all of us at STHQ.





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