Wanted to very quickly show mathematically how to determine position size when trading.
Assuming a trader has $100,000 – and plans to risk 1% of his capital on a trade ($1,000)
- He needs to figure out how many points he is willing to lose on the stock. e.g. Bob is bullish on $AAPL, he wants to buy at $120 and is convinced if the market goes to $110 he is wrong, thus $110 is his stop loss.
- In order to determine position size divide the amount you are willing to risk, by the difference between your entry and stop:
- =100 shares (12% of portfolio)