Position Sizing

Just some notes on ways of position sizing for trading, not for value investing. Two ways of position sizing:

  1. Percent Risk –  Determine what percentage of your total portfolio you would risk on a trade (e.g. 1%). Number of shares to buy = Amount to risk (in $) / (Entry price – stop loss price).
  2. Percent Volatility – Determine what is the volatility you would tolerate on a position (dollar fluctuation of that position per day). Number of shares to buy = Volatility amount (in $) / Average True Range (over say 10 or 21 days). Because each share’s volatility is the average true range, with the calculated position size, that volatility of that position matches the tolerable volatility amount.


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