How Many Shares Should You Buy? Position Sizing Guide
In this video I go over 3 different position sizing methods you can use to work out how many shares to buy.
Risk management is often overlooked but it's very important to keep a consistent level of risk across all of your trades so that one trade can't blow your account up and you can remove the emotion from your trading when deciding how many shares to buy so you don't get caught up in the moment and put on a trade too big for your account.
Here are 3 examples of different position sizing methods;
POSITION SIZING #1:
- Equal Weighted Position Sizing
With this method we want all positions we open to have the same value, for example on a $10,000 account if we choose 10% position sizing, that would be $1,000 target per position. To work this out simply divide $1,000 / current stock price = shares to buy. For example on $AMC with a current stock price of $33.94 that would be 29 shares (1000 / 33.94).
POSITION SIZING #2:
- Stop Based Position Sizing
With this method we want all positions to risk the same $ amount if the trade hits our stop loss, for example on a $10,000 account a good level of risk per trade is 2%, so that would be $200. To work this out simply divide the target $ risk / size of your stop = shares to buy. For example on $AMC with a stop loss of $5.04 that would be 39 shares (200 / 5.04).
POSITION SIZING #3:
- ATR Based Position Sizing
With this method we want all positions to risk the Average True Range (ATR) * 2, for example on a $10,000 account with a target risk per trade of 2%, that would be $200. To work this out simply divide the target $ risk / ATR * 2 = shares to buy. For example on $AMC with a ATR of 2.92 that would be 34 shares (200 / 2.92 * 2).
At the end of the day it's important to find a method that suits you and your trading strategy that you can stick to consistently.
Risk management is often overlooked but it's very important to keep a consistent level of risk across all of your trades so that one trade can't blow your account up and you can remove the emotion from your trading when deciding how many shares to buy so you don't get caught up in the moment and put on a trade too big for your account.
Here are 3 examples of different position sizing methods;
POSITION SIZING #1:
- Equal Weighted Position Sizing
With this method we want all positions we open to have the same value, for example on a $10,000 account if we choose 10% position sizing, that would be $1,000 target per position. To work this out simply divide $1,000 / current stock price = shares to buy. For example on $AMC with a current stock price of $33.94 that would be 29 shares (1000 / 33.94).
POSITION SIZING #2:
- Stop Based Position Sizing
With this method we want all positions to risk the same $ amount if the trade hits our stop loss, for example on a $10,000 account a good level of risk per trade is 2%, so that would be $200. To work this out simply divide the target $ risk / size of your stop = shares to buy. For example on $AMC with a stop loss of $5.04 that would be 39 shares (200 / 5.04).
POSITION SIZING #3:
- ATR Based Position Sizing
With this method we want all positions to risk the Average True Range (ATR) * 2, for example on a $10,000 account with a target risk per trade of 2%, that would be $200. To work this out simply divide the target $ risk / ATR * 2 = shares to buy. For example on $AMC with a ATR of 2.92 that would be 34 shares (200 / 2.92 * 2).
At the end of the day it's important to find a method that suits you and your trading strategy that you can stick to consistently.