Tuesday, April 4, 2017

Position Sizing

Position Sizing is one of the important factors in your trading and investing. How many positions should you hold? How much cash should you just leave as your position? How do I allocate my funds on my positions. Do I buy one time big time or do I buy on tranches?

First of all let's look on how many positions is applicable for a starting trader. For a starting trader with P100,000 fund. I would ask you to focus on one position first. Why? Newbie traders coming in the market has still excitement on them. They want to put all their money and buy all the stocks they know and make their portfolio looks like a fund manager portfolio. They believe that they need to spend all their cash in just one go so that they can leave it overnight and tomorrow they might see their positions gain already. Of course when they woke up the other day it is the opposite of what they thought. Then they go to forums or groups show their port and ask the big question WHY?

Why? Well as a newbie first of all mistake you did is buy without a plan. You entered because you see the hype on a group where in those posters are full of euphoria and happiness that their stock has risen. Avoid those emotions. The market has no need for emotions and those celebrators are just mere noise. They will post chart that will tell you that the RSI is still pointing up even when it's already at 100 and at the overbought levels. Of course it was intended for you the Newbie who doesn't know what you are doing in the market.

So how do you avoid it? As a newbie position sizing comes from your confidence in buying the stock. If you do not know the stock you can either just wait for another opportunity and just leave your cash hanging. After all cash is a position too. What if you really want to risk? Then buy some boardlot of that stock and risk on. Buying the boardlot will cost you some commission costs but will also save you when it comes to danger. Always put in mind how new you are in the market and that you don't know anything yet. Be practical. Better safe than sorry.

Next for newbies are if they want position or long term stocks. I advice that you buy on tranches. If you want to buy now of a certain stock test it first. Newbies most of the time has no idea on support and resistance so it's better to test first your chosen stock so when it goes down you can still buy more. For example you want to go to DD and you have a P100000. At the current price of 54.10 you are not sure if it is a good buy. Then buy for 10000 first. After that the price fell at 53.35 and it looks strong then buy another P20000. Leave the P70000 for future use. The next day DD went up to 55 you can see that your stock is really strong. You can either buy your P20,000 to put in DD at those range especially if it just went up on that day. It means that the price reverses and the movement is good. What will you do with the other half? You can use the P10000 of it for trying to swing on some shorter term stocks. The P40000 is just a reserve to save you on whatever might happen in the long run. After all cash is a position too.

What if I am not a newbie. I have an experience already and I know some technicals? How will I do my position?

For those with experience and system you can put 50% position, 30% swings, and 20% cash. You can use the cash on day trading or scalping if you found a momentum stock. But make sure if things go wrong cut! That is meant to be your saving grace when a trade goes wrong. Like how newbies bought in tranches it is advisable for experienced traders to buy on tranches too cause the market is not predictable. You might think that it is already the bottom or the support but then it isn't. Unless you are the one who goes all in on a trade and has a cut loss plan then it is also still upon you. Different strategies for different people.

Although there is a saying that Wise men say only fools rush in yes there is really truth on that. If you are lucky then you will be happy with your gains but if you are unlucky then it might really hurt especially if you don't know how to cut.

For larger capital you can have 2-3 positions. Why few position? We need focus on our stocks. The higher your focus the more you can take care of your stocks. You can also do some exit strategies the best. Also you will have conviction on your chosen positions. Also have cash that you can hold so when your stocks dip you can still add on your positions and if you have seen a momentum opportunity you can easily play it without looking for loosening some cash on your positions.

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