How big or how small when your position be in any given trade? Prior to I get into the answer to that, there is one prerequisite that supersedes everything, the liquidity of what you're looking to trade. You need to keep your position size to little of a percentage as the average daily money volume. You may estimate the average money volume by taking the price and multiplying it by the average level of shares bought and sold daily. In case a stock that is trading at $1 averages in between 100, 000 and 300, 000 gives, the average money volume level is probably in the ballpark of $200, 500. How much of the average money volume do you want to be? The less the better, but there is not any official tolerance to stay under. I had created say staying under 2% is pretty safe, but if you act like you really know what you're doing you can push that somewhat. There have been lots of trades where I've 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 have the pennis liquidity issue covered, this is how I determine my position size. To start with, I need to know a few things to find out what my position size should be. Those are; How much I'm willing to lose on this trade, where my entry is, and where my stop loss is at. For instance , say I am watching a stock that is an uptrend, but is actually currently falling to support at $1. Considering that the longer term trend is up, I'm looking to buy into the support at $1, but if that support fails to hold, 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 gives, that means that should my stop loss get triggered I want to00 lose one-hundred dollar. So my entry is at $1, and my stop loss will be all you need 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 is at $1, and the stop loss is at $. 96. Depending on that, my position size would be 4,000 shares. 4000 shares multiplied 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 there 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, 500 figure. You then simply need to factor how many shares you can aquire with that amount.
If you always endangered 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 damage. 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 best, most relevant support/resistance is at, or both, then use that wider stop, but change your position size accordingly. That way, you're still allowing the proper amount of stream room for price fluctuations, but you're still risking the same amount if your stop gets hit.