Money management: Position sizing

In order to mitigate risk, it is important to put on a junior starter position of 1/2 of a normal-sized position or less. This can be added on to should the position move in the correct direction. As far as actual position size goes as a percent of your account, that is a matter of personal taste. Some people like two or three names, while others prefer 20. For most people, 5-10 makes sense. I can tell you what I do, but that may not necessarily be what is best for you.

In the right type of market, with dozens of growth stocks building bases and breaking out, I target five positions. E.g., I would start with 5% in a position and use a 5%-7% stop, usually. With a stopout at 7%, my account loss is only 0.35%. I consider this minimal compared to the return potential of being in leadership names in the right type of market. Should the position move in my favor, I will then add on an additional 5% so that I am at 10% of the account. I will then add on two more of these 5% positions so that I have 20% in one stock.

I repeat this process with four other names to become fully invested. As time goes on, I will sometimes exit the laggards of these and direct money toward the bigger account performers. This force-feeding process may leave me with three or four positions ultimately.

My goal is to end up with three to five names, but some cycles it may be seven if I do not have the confidence in either the general market or the actual leaders themselves. While three to five names is considered aggressive, the way I get there is fairly conservative, at least in my opinion.

I hope this is helpful. “Better safe than sorry” is a good motto. Again, position sizing is a personal decision. It depends on each trader’s temperament, experience, and risk tolerance, among other things. If you are ever worried about your account, then that is a sign that position sizing is not optimal.

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3 Replies to “Money management: Position sizing”

  1. Awesome discussion. I’ve become convinced that position sizing, money management and exit strategies are key success factors and perhaps more important than the entry. Unfortunately, these topics are under represented in discussions and books. I’ve had great success in picking stocks that result in positive gains (better than 70%); however, my results are mediocre, I believe, due to sizing, money management and exit issues on my part. Please provide additional future discussion around these factors.

    Please elaborate on “should a position move in my favor.” Do you look for a certain percentage increase before adding to a position? Certain volume action? And what do you do with your underlying stop(s) as the price moves up?

    thanks!

  2. Jeff, thank you for your comment. I prefer to add on a pullback or breakout from a short-term congestion area (does not have to be a formal five-week-plus base). Mainly on a pullback. Once an add-on position rises a certain amount (it varies given the context of the particular stock), the stop for the entire position is moved up. Bill’s technique of adding once price is up 2%-3% past the buy point is excellent. You will find that certain technique that best fits your makeup. There is not a one-size-fits-all approach to either money management or trading generally.

  3. Hi Kevin,
    The traditional half position entry with 3% and 2% adds is not my favorite way to enter, mostly due to the frequent pullback to the buy point once all in. I have adopted your 4 entry positions and i am much better suited to adding on pullback or above congestion. Thanks for that suggestion here. Are you in a full position under 5%? Do you take it as it goes? In other words, an entry at the break of the high of pattern or consolidation, price goes up and pulls back to near the entry. Is that a valid add point on your pullback entry or do you like to add as price goes above 2-3%. Ive had some that the pullback entries got me in a full position by 3% so the average cost was advantageous. But I m not clear yet whether that is the more risky add on since the break out has not yet proved itself. Whereas if it goes up 3% and then gives a pullback entry, more confirmation perhaps. I have ended up with several awesome winners however I did not have all the shares!
    Your service is something you should be very proud of, you are just the same person and same consistent trader that I knew back in the day. I appreciate your candid conversation on the videos and I love that you still go through your charts one by one on your watch list as you taught me to do and won’t do it any other way!
    So very glad to be in your service. Thanks so much! Janet

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