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. While there are different ways of building a position, I prefer pyramiding using a 50/30/20 method. This means putting on a starter tranche and then adding on two successive tranches, each smaller than the previous one.
For example, my targeted position size is 20% of my account. Once price crosses the entry pivot, I will buy a starter position of 50% of my 20% target. If price moves up 3%, a second tranche of 30% of my 20% target is added. If price moves up 2%, a third tranche of 20% of my 20% target is added. Thus, a full position is established by the time price is up 5% from entry, yet the average cost is about 2% above the pivot.
Assumptions: 100-share position w/ $100 entry
- $100: 50 shares
- $103: 30 shares
- $105: 20 shares
Avg cost: $101.90
Benefits of the pyramiding method: 1) Your entire position is entered about 2% past the entry pivot (1.9% in the above example), and 2) The biggest tranche is entered at the lowest price.
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.