How big or how small when your position be in any given trade? Just before I get into the solution to that, there is one prerequisite that supersedes everything, the liquidity of what you are looking to trade. You need to keep your position size to little of a percentage as the average daily money volume. You can estimate the average money volume by taking the price and multiplying it by the average amount of shares bought and sold daily. If the stock that is trading at $1 averages in between 100, 1000 and 300, 000 stocks, the average money volume level is probably in the ballpark of $200, 1000. How much of the average money volume do you want to be? The less the better, but there is absolutely no official threshold to stay under. I would say staying under 2% is pretty safe, but if you really know what you're doing you can push that relatively. There have been a lot of trades where I have gone more than 2%, but in those cases if I didn't get buying momentum to sell into, I paid the price.
As long as you possess the liquidity issue covered, this is how I determine my position size. To start with, I need to know a few things to determine what my pennis position size should be. Those are; How much I'm willing to get rid of on this trade, where my entry is, and where my stop loss is at. For instance , say I'm watching a stock that is an uptrend, but is actually currently falling returning to support at $1. Since the lengthier term trend is upward, I'm looking to buy into the support at $1, but if that support fails to keep, I'm going to pacte. The most I want to risk losing on the trade is one-hundred dollar. That doesn't mean my position size will be $200 worth of stocks, that means that should my stop loss get triggered I want to00 lose $200. So my entry is at $1, and my stop loss will be adequate below that to allow for normal market fluctuations, we'll say at dollar. 95. So now I know all the factors to determine my position size. My maximum risk will probably be $200, the entry reaches $1, and the stop loss is at $. ninety five. Based on that, my position size would be 4000 shares. 4000 shares increased by $1 is $4000, and 5% of that (which is what my stop loss is set at) is $200. An easy way to find this out is by dividing your maximum risk amount by the percentage of the stop loss. In this case, it would be $200/ 5%, which would give the $4, 000 figure. You then just need to factor how many stocks you can purchase with that amount.
If you always risked the same amount on every trade and kept an arbitrary percentage for your stop losses, your position size would always be the same (in dollars). My problem with this is that an arbitrary percentage doesn't make sense to me since all stocks and charts are different. The stock and the chart should dictate your stop reduction. A 5% stop may work great on a single stock, but on another much more volatile one it could get triggered way too easily. If you feel that on a certain trade you desire a 10% - 20% stop damage because of either the volatility, where the closest, most relevant support/resistance is at, or both, then use that wider stop, but modify your position size accordingly. That way, you're still allowing the proper amount of stream room for price variances, but you're still jeopardizing the same amount if your stop gets struck.