A trader named Thomas recently asked the following:
Jeff, What percentage of your trading portfolio do you put on one trade?
This was my reply:
Rather than designate x% of my funds (ex: 10% of account) to each trade or a set amount of money per trade (ex: $20,000 per stock), I take a different approach. I will typically designate an amount that I’m willing to lose in any given trade should it happen to fail.
The difference is that I’m weighing my actual risk, not the capital required to put on a position.
That amount for me is usually in the neighborhood of .5% (1/2 of 1%) of my account. For a round-number example, on a $100,000 account that would equate to a max loss in any trade of $500 (.5%). That amount will change periodically based on a few factors, including:
- My confidence in the setup. If the play looks exceptional, the risk/reward is better than usual, and the overall market conditions are particularly conducive for the play, I may be a bit more aggressive than if it were simply a clean pattern which looks to have some potential.
- The way I’ve been trading. If I’ve been trading well, then I need to scale up my size and take advantage of that so that I’m pressing only when I’m ahead. I want to be more aggressive when I’m trading well and back off when I’m not. If I’ve been off my game, then I’ll put less on the line until I start to find my groove again. Therefore, my recent performance always has a direct influence on my size.
- The personality of the stock. A wild stock with big fluctuations is going to get less of my money than one that moves slower, which is directly correlated to the width of the stop and therefore the size of the position. How a stock behaves should always play a role in ‘how much.’
- How many other positions I’m expecting to have. If there are quite a few plays surfacing, I want to be getting positioned in several of them. Often that will mean I’m splitting funds a little more thinly across the larger number of plays. But if there isn’t much happening and I can devote more of my attention to just a couple of positions, then I just stick with full-sized positions based on the % of risk I’m currently accepting.
So at times I’ll have more on the line than at others, but usually it’s between .5% and 1% of my account at risk of loss in any given trade.
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