Being Right or Making Money – Position Sizing

So now after shortlisting the possible candidates of counters. We can move to the next step. Of course you can certainly add on more critera (filters) like spreading across sectors/industries etc…

I definitely do not hunt for hot tips, speculative, pennies, or the lastest and current most fashionable counters to dabble in… anyway..that’s my “filter”, not necessarily yours. 🙂

2) How Much to Buy (Position sizing)

Position sizing is a disciplined approach to decide how many quantity of shares to buy. It is close to deciding to how much money to risk, but its not exactly the same thing.

“Eh siao lian eh…this one simple la… I got $50k to play…if I bio 5 counters, I very fair one…each one get $10k…swee right? Eh wait wait…dun think I stupid… I also prefer smaller counters…move more, I make more…and faster!”

Ya, and die faster too.

In my opinion, apportioning equal lots or money across the counters is not actually spreading risk properly. I like to analyse the market as a whole first, and if the conditions is right, enter, and at the same time apportion equal risk exposure equally across all the counters.

Textbooks often measure risk in terms of volatility. Sharpe ratio, Standard Deviations … etc a lot of counters and funds are ranked according to their volatility when it comes to risk.

So, it is not the same if we have the same amount in GSAT (Nasdaq), which moves like 100% of its share price in 2mths, and MMM (Nyse) which moves 10% in 2mths, you can see that it is totally not the same equal weightage.

I favour using volatility to decide my position sizing. Let’s use Standard Deviation as an example, you definitely have this indicator in most basic charting software.

“Eh siao lian eh…i checked liao…my chartnexus dun have standard deviation leh…can dun use this chim indicator or not…wa lau eh….”

You can use the bollinger band…the upper and lower band is based on how much standard deviation you want to input.

“Eh siao lian eh…diam la, I also know…testing you only…”

You can use 1.5 or up to 3 as your parameter. 1.5 represents around 85% of the price movement, 2 is 95% and 2.5 or 3 is 99% like that.

So now, incidently, you have also pinpointed your stop loss! For example, if we use the STI Index as an example (sorry, I’m not comfortable showing SG listed tradable counters….dun want compliance chasing me…) you can see that my lower bollinger band is at 3180.5, so the standard deviation is 3260.3 – 3180.5 = 79.8

STI StdDev Bol

So if I were to buy now, 3180.5 will be my stop out level. If I wish to risk S$1,000.00 for this trade, then my number of shares to buy is now: $1,000/79.8 = 12.5 shares or units.

 (The $1,000.00 is arbitrarily chosen here…. AND, you SHOULD NOT arbitrarily choose this figure too! Most online advisors would recommend 1% – 2% of your capital to risk per trade. Alexander Elder recommends no more than 2% per trade or per counter AND no more than 6% total at risk for all current open positions. I will try to elaborate more in future when I rehash the post on maximum drawdown.)

So there! That’s position sizing. Do the same for all your counters….this way now…you have just spread equal risk (measured by volatility) weightage across all counters.

Now what about people who trades using support and resistance, or buying on dips during an uptrend?

See the white line? Now suppose that is the current support line, and it also looks like a prior minor low or dip…so that can be your stop loss level, at 3159.46, so similarly, the number of units to buy is S$1,000.00 / (3260.17 – 3159.46) = 9.9 units or share.

I tend to use this method for attributing stop loss and position sizing when Im using Elder’s Triple Screen method (or buying on the dips during bullish uptrend period) to analyse counters.

Of course we also have chart pattern players….there are many ways to decide the stop loss (set a point where the pattern has failed or fail to breakout etc) and from there use the same calculation.

A good place to train chart pattern trading is here: peterbrandt.com or his book on trading dairy. He also refers extensively to Magee’s technical analysis book. (which I have not read as I am totally uncomfortable reading / spotting chart patterns)

I think I have bore you enough…disciplined trading is systematic and damn bloody boring…

“zzzz…eh siao lian eh….why never wake me up?!”

….. !!! ….

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