A look into Position Size and Risk/Reward - Put the odds in your favor
It is usually said that picking stocks is the easiest job of trading. The hard part has always been said to be the management side. That is, managing emotions and managing positions. Today’s topic will cover managing positions.
When I first started trading I always took trades with the same dollar amount. The stock could be worth $5 or $50 either way I bought enough shares to match that dollar amount. After I placed the trade I would find a ‘suitable’ area to place my stop-loss, and then sit back and watch the magic happen. Unfortunately there wasn’t much magic to be had. My gains were usually small and my losses were usually a lot bigger. I tried to make up for this by tightening up my stop-losses but that just got me stopped out to quickly.
Finally I decided I need a better system and so now I have the new and improved position calculator. I worked up an excel spreadsheet that allows me to put in my portfolio size, how much I want to risk, buy-in price, stop price, and target price. From this it tells me how many shares I need to buy, what my risk/reward is, and how much the position will cost me.
Here's how I created my spreadsheet.