Thinking Big Doesn’t Imply Trading With as Big of Size
Every successful trader knows what’s the only key behind consistently making money in the market. In fact, it’s not about how much initial capital you have or about having any “secret” scheme that works on every single trade. It’s all about skills. Nothing else. The sooner one trader understands that, the better.
Obviously, in order to develop the required level of skills to get where we want, there are some requirements that need to be well on point together with a never-ending ability for adapt to the surrounding market conditions. If you’re approaching this trading practice with a willingness to turn it into a long-lasting career and not just as a summer hobby, you may already know that every single detail counts and can make the difference in the long run.
Here is the good news about this one article though, because I’m about to explain to you a process that would help you relieving the pressure of taking care about one important aspect of trading which is sizing. In fact, thanks to this simple system, you’ll be relieved by having to think about how many shares you’ll need to hold when opening your next position.
Let’s Approach Sizing Incrementally
Here is the incremental process, easily explained. The whole concept behind this approach is about increasing trading size as skills get improved over time. But let’s start with defining a certain unit of time after which trading results will be easily assessed (green vs red). You can use a weekly time span if you feel aggressive or monthly if you wish to be more conservative (there is absolutely nothing wrong with that!). Considering also a bi-weekly option can be a great idea. In my example, I’ll be using the weekly one.
Now, let’s define a base sizing depending upon the stock price you’re planning to trade:
- Stock price $20 – $30: 250 shares (stop distance 60c)
- Stock price $30 – $55: 200 shares (stop distance 75c)
- Stock price $55 – $100: 150 shares (stop distance $1)
- Stock price $100 – $150: 100 shares (stop distance $1.5)
- Stock price $150 – $250: 50 shares (stop distance $3)
In this one case, I’ve defined the base sizing to be 50 shares (but you can even use 10 or 20 shares, nothing wrong with that either). Look, this system has been designed for higher price stocks with a range between $20 – $250 which is what I’ve accrued experience trading. Maximum stop distance from the entry point has been calculated not to be higher than $150 on the first week. Of course, you are invited to readjust it if it doesn’t fit your own risk tolerance.
At the end of week number one (or your own defined time span) of your trading journey, that’s when the adapting system comes into play. If you ended up the week green (with more capital than you started with), you’re authorized to scale up sizing proportionally with the amount of your base sizing.
All you need to do is dividing the base sizing (50 shares in this case) by five (number of levels). Then, it’s time to update the whole table above by incrementally adding the result (50 shares / 5 = 10 shares) on each row. So, at the end of first week ended green, here would be the new sizing to be used for the upcoming week:
- Stock price $20 – $30: 300 shares (250+50)
- Stock price $30 – $55: 240 shares (200+40)
- Stock price $55 – $100: 180 shares (150+30)
- Stock price $100 – $150: 120 shares (100+20)
- Stock price $150 – $250: 60 shares (50+10)
Instead, after each week that will end up red, the consequence is to scale down sizing by the amount of defined base sizing (using the same calculation shown above). If you’re still skeptical that you can reach a good sizing using this one system and in order to show you what the sizing would become after one year of trading of consistently using it, here are the numbers (assuming 37 green weeks and 15 red weeks in a year):
- Stock price $20 – $30: 1350 shares
- Stock price $30 – $55: 1080 shares
- Stock price $55 – $100: 810 shares
- Stock price $100 – $150: 540 shares
- Stock price $150 – $250: 270 shares
Not bad, eh? I believe that’s a great way to gradually upgrading to a higher exposure and being driven by results. Good results should always be the input for going in bigger and never the opposite. This one system would have helped me saving time and money at the beginning of my journey and, after testing it in my personal experience successfully, it’s now time to share it back with you.
“Headlines, in a way, are what mislead you because bad news is a headline, and gradual improvement is not.” – Bill Gates
See you in chat-room!