Robotic Investing Position Sizing Method

Robotic Investing Position Sizing Method

August 23, 2018 0 By Jeremy


Robotic Investing Position Sizing Method

I have been doing a lot of reading lately about risk management and the psychology of trading.  One of the most common themes through all of that is the impact of position sizing on both risk as well as managing emotions.

One of the quotes from Mark Minervini’s book “Think and Trade Like a Champion” really drove the importance of position sizing home for me.  This description is nice because of its simplicity and ease of implementation.  There are a number of position sizing methods out there from super simple to super complex.

Your goal should be optimal position sizing. The size of your position should be determined by how much equity you stand to lose if a trade goes against you. Let’s say you have a $100,000 portfolio and you put 50 percent ($50,000) into one position. With a 10 percent stop, you cap your loss at $5,000. But that’s 5 percent of the total equity of your account—and that’s too much risk. If you were to suffer a string of such losses, you would put yourself at risk of ruin.

Instead of arbitrarily picking a number, your maximum risk should be no more than 1.25 to 2.5 percent of your equity on any one trade. The less experienced you are, the less risk you should take on because you are at or near the bottom of the learning curve and more prone to mistakes and losses.

Why is Position Sizing Important?

There are a number of reasons position sizing is important.  Here is a list of the ones that are most relevant to me based on my trading beliefs and how I trade:

  • Position sizing determines the size of your position, which is the first step in managing risk
  • Sets the amount of equity that you will put at risk in any one trade
  • Is the mechanism that helps determine your stop value
  • Keeps the trade from becoming a burden emotionally
  • Determines exactly when to sell a trade if the setup does not work

That is a just a summary of the reasons it is important.  All that said, the most important benefit of position sizing is that it determines how much risk you are going to put on any one trade.

The Robotic Investing Approach to Position Sizing

There are a number of ways to do position sizing.  From the fixed percentage model, to maximum drawdown, or the Kelly Criterion, the position sizing cat can be skinned many different ways.

I have chosen to use the one that works best for me, and in my opinion is the simplest.  Here are my rules for position sizing for my ETF Swing Trading strategy and my Bollinger Band Breakout strategy.

Position Sizing Approach:

  • Each trade is 1.00% of total equity with a 7% maximum loss (i.e. 7% stop loss from purchase price)

Example of Risk Amount:

  • $50,000 trading portfolio with 1.00% risked and 7% max loss
  • 1.00% x $50,000 = $500 max risk per trade
  • $50,000 x 14% = $7142 position size
  • $7142 x 7% max loss = $500

Determine Number of Shares to Buy AND Stop Value:

  • $7142 / Share Price = Number of shares
  • $7142 – $500 = $6642 sell value
  • $6642 / Number of shares = Stop Price

That is it – simple but effective.

All that said, there are other things that I do that help manage the trade while I am in the trade.  For example, I do use trailing stops to make sure I lock in profits and never let a gain turn into a loss.  If you want to see those posts as I write them, then please Subscribe to the newsletter.  All my newsletter is is a notification to you that a new post has gone live.

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