Position Sizing To Control Risk

Before I move into your position sizing of a trade I have one thing to add to yesterdays notes. Yesterday I spoke of a hypothetical 100k account. First you have to decide the maximum number of issues this account will hold.  Let’s say that number is 5, for arguments sake and you want to keep things amongst those five equal in terms of dollars. It follows then that 100,000/5 = $20,000 maximum commitment to any one issue. If the number of issues you are comfortable with is 10 then the max commitment is $10,000 and so on. You all have calculators  😎

Recently I started posting trades on my watch list spreadsheet. These trades come from the Kirkpatrick and the 50 watch lists:

Screen Shot 2014-06-25 at 10.00.18 AM Click picture for a full sized image or go to the Google spreadsheet. Let’s start with the first trade entered JAZZ – Jazz Pharmaceuticals. After the buy price you will see a column – initial risk which was 129.92 at the time of entry.

JAZZSo let’s do the math. Buy point $142.99 minus initial risk $129.92 = $13.07. If we are using 5 as our maximum positions then we have $20,000/$13.07 = 1530. However, 1530 shares times 142.99 = $218,775 double our account size. Hmm.

If however, we take our max dollar commitment of $20,000 and divide by our purchase price we come up with 139.87 shares. I would round to 140. If we exited at our initial risk point of $129.92 times 140 shares = $18,189 or a loss of (20,000-18189 )= $1811 loss. This of course is a 1.8% loss of the 100k and not 3% which would be fine with most anyone. In this instance, of course, the initial risk is no longer valid as the new exit strategy is at $140.39.

For my personal convenience, and for tracking purposes, I am buying and exiting on the open. You may be able to enter and exit in the pre or post market arena and can figure prices there. Remember nothing is perfect but if we can come close, over time we’ll do just great 🙂 Many of the screens and trading systems used on this site give an exit strategy.

While I use the chandelier, use whatever entry and exit technique you desire.



Talking Points and Google’s Top Five Futuristic Projects:
Hold off on America’s house party. (WSJ)
Is It Time To Sell Stocks And Buy Bonds? (Short Takes)
Equity crowdfunding is a disaster waiting to happen (Slate)
Master Limited Partnerships – Part II (David Kotok)
Is the Yale Model Past It? (Above the Market)
The bond market’s pessimism is vindicated (Scott Grannis)
China’s new paper tiger? (Humble Student)
Do You Have What It Takes? (Sigmond Holmes)
Here is how you should think about inflation (Dash of Insight)
Car Loans Becoming the Next Bubble in Banking (24/7 Wall St)
Housing Isn’t Overvalued, Except in These 10 Spots (MoneyBeat)
A Hunt to Find the Next Generation of Financial Planners (DealBook)
The Only Viable Strategy Is Adaptation (HBR)
How the American Diet Has Failed (Wonkblog)
Stock Buybacks Charge up the Bull (Dr. Ed’s Blog)
Equity Premium Getting Smaller? (Advisor Perspectives)
Marketers Don’t Need to Be More Creative (HBR)

Google’s Top Five Futuristic Projects

Have a Great Day!