Our TradeStops technology team is always providing us with statistics as to which pages on our website are the most and least visited. And one of the least visited is a page that can help investors put TradeSmith’s equal-risk position sizing into action.
It’s the Position Size calculator. The Position Size calculator is a powerful tool helping you in the management of your overall portfolio. It’s located under the “Research” tab at the top of the TradeStops site.
We’ll look at each section individually to show you how important this tool can be and how you can put it to work immediately.
The first section is fairly simple. Let’s use INTC (Intel) for our example. We’ll start by looking at the chart for INTC.
INTC triggered a new Green Zone SSI Entry signal on 8/10/2016 and its high price of $38.10 was set on 10/7/2016. The closing price on 10/27/2016 was $34.81.
Here is the first section of the Position Size calculator. We are using the closing price of $34.81 as our starting point.
For the second section, the amount that we are entering is the amount of money we are willing to lose on this trade. For this trade, let’s enter $1500 as the amount we are willing to risk.
Now comes the fun part. This is where we determine how many shares we can buy of a position, in this case, how many shares we can buy of INTC. We have several choices so let’s see how each decision we make determines how many shares we can buy.
The default decision in the third section is to use the Volatility Quotient as our trailing stop loss. The Volatility Quotient represents the normal volatility of any stock or fund. We can see that the Volatility Quotient for INTC is 17%.
After clicking on the “Calculate” button, the Position Size Calculator tells us how many shares we can buy.
Based on the VQ of 17%, we know that we can buy $8800 of INTC, or 253 shares of INTC, in order to have $1500 at risk.
This assumes that we are taking a full 17% risk with INTC stock trading at $34.81. Our stop would be $28.89.
Our second choice allows us to enter a percentage-based trailing stop. We are free to choose the percentage we want to use. For our example, let’s use a 25% trailing stop which is the standard in many financial publications.
And here is the output. You’ll notice that we cannot buy as much by using a 25% trailing stop. That’s because we are taking more risk per share. In order to have $1500 at risk, we can only invest in 172 shares.
Our third option is to choose the price that we want to use as our stop. In this case, I’m randomly choosing $28.00 as the stop price.
And using this $28.00 stop allows us to buy 220 shares of INTC.
Our last option is to use the Stock State Indicator Stop Loss setting. This is based on the most recent high of the stock. In the case of INTC, the most recent high was $38.10. Based on the VQ of 17%, the SSI Stop is set at $31.63.
Because INTC is trading below its most recent high price, by using the SSI Stop Price, we will be taking less risk per share. This will allow us to buy more shares. According to the calculation, we can now buy 471 shares of INTC.
We invite you to try out this tool using some of your favorite stocks. For instance, pick out 3 stocks with different volatilities and see how much you can buy of each using the different stop type settings.
When you are putting together your portfolio, using the Position Size calculator allows you to intelligently take the same dollar amount of risk per position. According to TradeSmith, this is the key to making more and risking less.
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