If you have any money in the stock market you MUST know this one position size calculator for stocks equation.
It has the power to turn even the worst investors profitable and break-even traders into money-making rock stars.
Let's check it out!
Trading Isn't About Winning and Losing
Most believe that all you have to do to make money in the market is listening to analyst recommendations or breaking news and they'll be set for life.
They couldn't be more wrong!
When it comes to investing and trading 95% of people have no clue what they're doing.
For instance, trading really isn't about winning and losing.
It's all about the RATIO of how much you make vs. the worst drawdown you can stand.
It's well known in professional circles that hedge fund clients start to get very uncomfortable after a 20% drawdown...to the point they call up and complain and often withdraw their money completely.
Now, my personal threshold for a drawdown is 25%.
Only you can answer what your threshold is.
You have to use real money to find out what your personal risk tolerance is.
I guarantee you won't learn a thing by "paper trading."
I'm asked all the time how much of a stock or ETF to buy, which I can't answer.
I can only guide you to two equations that I've found work well for me.
Let's look at two ways to calculate position sizes for trades...*cough*...remember I can't tell you which way to do it.
The Popular Position Size Calculator
Here's the popular approach to making a position size calculator for stocks.
Simply divide your money evenly between your number of positions.
I'll use the example of ten here because I usually trade 10 different positions simultaneously.
Number of shares = ( account size ) / ( number of positions * stock price )
Example: Number of shares = ( $50,000 ) / ( 10 * $25 ) --> 200 shares
Notice that with your account size in the numerator, the number of shares bought will increase or decrease based on account size.
This provides great compounding power, which you need to make a fortune.
OK, that's simple enough.
The Way Professionals Make A Position Size Calculator
As a quick thought exercise, would you have traded with more or less money back in 2008 when the market was going bananas?
I hope you said "less"!
This is something I've seen countless times in my trading career; the people trading with too much money tend to lose it all.
As a professional trader, you must take into account one incredibly important piece of information:
"Volatility" (How much a stock's price is moving around)
You can measure a stock's volatility using average-true-range or "ATR" which can be found for free on most financial news websites (like FinViz), or you can calculate it yourself with a little computer code.
Try using this equation for starters:
ATR = average(absolute_value(close - close), atr_Periods)
Knowing a stock's ATR, let's look at the way professionals calculate the number of shares to buy at any given point.
Number of shares = ( account size ) / ( number of positions * stock price * stock ATR )
Notice that with ATR in the denominator, you buy more shares when the market is calm and less when the market is manic...
...because ATR is low in quiet times but high when things are going pear-shaped.
Also, note that with your account size in the numerator, you buy more shares as it grows, which compounds it rapidly.
This is a remarkably simple position size calculator for stocks, but it's the difference between massive success (the type of money that lasts for generations) and driving your account to zero.
- You must know the risk you can handle, which only comes from trading with real money in real-time
- Be a professional and treat your trading like a business
- By measuring volatility with the average true range you can make a position size calculator for stocks that is light years ahead of the crowd