Position Sizing Background For most of my investing career, I used a fixed dollar amount for money management when buying stocks. At the beginning, it was $2,000.

Feb 18, 2018 - Van Tharp Institute 7 Shareware. Experiment with different position sizing techniques. Position Sizing Spreadsheet Excel in introduction.

That bought me 100 shares of a $20 stock. I thought that's the method that everyone used. As I learned about the stock market, I knew that there were better ways to position sizing (money management) but I didn't know what they were. In the August 2007 issue of Active Trader magazine (), Volker Knapp (see Trading system lab: 'Percent volatility money management') tested a system that used volatility to determine the position size. I already use volatility to determine stop placement (see ), so this was a welcome addition. The article was based on Van K.

Tharp's book. Percent Risk Position Sizing The first method, percent risk position sizing, is well known and it's based on risk to determine the position size. For example, if you are looking to buy a stock with a price of $20 and a stop loss of $19, with a maximum loss of $2,000, you should buy 2,000 shares. The formula for this approach is: DollarRiskSize/(BuyPrice - StopPrice) In this example, the DollarRiskSize is $2,000, the BuyPrice is $20 and the StopPrice is 19 giving a result of $2,000/($20 - $19) or 2,000 shares. Percent Volatility Position Sizing The percent volatility position sizing method adjusts the risk according to the stock's volatility. Tests described in the article say it performs much better than the percent risk method.

Here's the formula. PositionSize = (CE *%PE) / SV Where CE is the current account equity (size of portfolio). SV is the stock's volatility (10-day EMA of the true range). For example, if the current account equity (CE) is $100,000, the percent of portfolio equity we want to risk (%PE) is 2%, and the stock's volatility is $1.25, then the result is: ($100,000 * 2%) / $1.25 or 1,600 shares. Instead of calculating the 10-day exponential moving average of the true range, I just calculate the volatility using, which provides it at the click of a button.

The downfall of these two methods is that if your portfolio is $100,000, then the trade just described would chew up 1,600 shares x $20 buy price or $32,000. Thus, you can buy just over 3 stocks, giving you a concentrated portfolio. The percent-risk method would be even worse with $40,000 used for just one stock.

(Of course this assumes that the stocks share the same buy price, volatility, and so on). One way to avoid the concentrated portfolio problem is to divide the $100,000 into $10,000 allotments (or whatever size you feel comfortable with that would lead to a diversified portfolio), one for each stock. Use the same formula to determine the share size. In the percent volatility example, the computation would be: ($10,000 x 2%) / 1.25 or 160 shares. I don't know what this does to the profitability of the method because the article's author didn't discuss this. In any case, this page is about position sizing and not portfolio theory.

Position Sizing Excel Spreadsheet Template I have an Excel which does the math for both techniques. To use the spreadsheet, first download it and then fill in the yellow cells with the appropriate information. The position size appears in the blue cells. The following shows what the template looks like. Bear Market Position Sizing When a bear market begins, I cut my position size to limit losses.