Hey this is Sasha Evdakov and thanks for joining me here at Tradersfly.com, where I share with you insights about trading, investing and the stock market. In this week’s episode what I’d really like to do is share with you some insight about Share Quantities, Share Size and Position Sizing.
I’m not going to detail in as much detail as I do in my create your stock trading system course about this trade size but I want to share with you some insight just about position sizing, how I go about it, how I approach it and just some things to think about.
The reason I want to give you just some things to think about is because everybody’s account size is different, everybody’s style is different, so your trading account size might be larger than this one person, or might be smaller than someone else’s.
Your risk tolerance could be a lot different than someone else’s you might have a higher risk tolerance than me or this person or that person. I can’t really just throw numbers out here and say this is exactly what you should do and this is how many shares you should trade.
Instead, once we go through this example, just think about it in terms of relative’s sake and how it would apply to you because everybody is different and I just personally don’t know you, your experience, your trading habits, your style and your account size.
You’ll have to make these adjustments and adapt based on what we discussed. In order to look at share quantities and share amounts that you should be getting, remember that there are different kinds of stocks out there.
There’s the Low Dollar stocks and then there’s the Higher Dollar stocks. Typically you’ll be able to trade a lot more shares in the lower dollar stock and a lot less shares in the higher dollar stock and that is just because of your affordability or your account.
For this example, I’m just going to assume to make matters easy, I’m going to assume you have a 10,000 dollar account and this would just help make numbers and things to work with a lot easier.
As we get into trading, you have to look at your own personal experience and your risk tolerance as you get into the share counts because with a low dollar stock, you’ll be able to trade many more shares.
While with the high dollar stock you’ll be able to trade a lot fewer shares. So how many shares should you really trade?
Well I think it also comes down to experience, the trade, liquidity and everything else that’s going on around you. So if you’re just getting started, if you’re brand new to the markets then you probably want to trade less.
If on a low dollar stock, you normally trade or thinking about trading or saying you can afford so many shares, let’s just say you can afford, let’s say 2,500 shares, you can normally afford on a low dollar stock and let’s say on a higher dollar stock you can afford let’s just say about 500 shares.
That’s just to make conversation sake a lot easier.
If you’re brand new in the stock market, really if this is the amount of shares that you can afford, what we’re going to do is then say “Okay, well I can afford 2,000 shares on average”, so what I might actually do is because I’m new I might only trade, since I can afford let’s say 2000 to make things easier.
I might actually only purchase, let’s say 300 shares to just get things started and that is because I want to keep my emotions in play, I want to be calm when I’m trading, I want to be leveled when I’m trading. I don’t want my emotions speaking and spiking because if you’re trading your full account at 2,500 or 2,000 shares, that dip a huge dip in your account.
It’s going to get really emotional, it’s going to get really frustrating and you’re not going to be a happy camper. It’s really good especially if you’re new to simply just start out with something light and trade maybe 300 shares or something like that, if normally you can trade about 2,000 or 2,500.
You’re trading a larger stock and you normally can trade let’s say 500 shares what you may want to do is trade something like 50 shares or maybe 25 shares or a hundred shares because remember larger stocks are going to move up and down much more than the smaller dollar stocks.
You’ll actually make it up even though you’re getting less shares, you’ll make it up in the move because they might move 10 to 20 dollars in just a single day. So don’t just think about getting more share quantity.
Instead focus on that percentage gain, and percentage move and typically the higher dollar stocks will move much more so. So this is basically if you’re new.
Now as you start progressing and if you’re a little bit better in trading, if you’re a little bit more experienced then of course you can bump these things up and you can still trade a little bit larger.
If you have some experience let’s just say you have some basic experience now if you can trade let’s say 2000 shares or 2,500 shares, what you may end up doing is you might trade, let’s say 1,500 shares and let the rest, you have the remaining capital for adjusting, fixing and hedging, it’s for risk management.
Typically you don’t want to trade your full account, there are certain moments when you do want to trade your full account but right now you still do not want to do that until we go over it in this next little bit of this section.
Even if you have experience in the markets, you still don’t want to trade your full account because you need it for hedging. So what does Hedging really mean? Let me simplify it for you. Normally if you’re looking for that stock to head higher and this is the pattern that that stock is moving or making.
There are certain points or areas where that stock is actually pulling back or retracing, now you don’t know if it’s going to fully roll over and continue down and move in this direction or if it’s going to continue moving higher.
So your long term view is to the upside but for a smaller time frame view, what you may end up doing for let’s say this long term view we’re going to say 2 months, for the short term view these little moves where the stock is retracing and pulling back I’m going to say that that’s 1 week.
For that 1 week time period what you may end up doing is actually shorting that stock or buying some puts or buying some vertical puts and capitalizing on this downward move because you need some capital.
That not only allows you to make profits on this downward leg but it allows you to protect this long position because it’s all about that protection.
This is one of the reasons why you don’t want to really trade your full account because if do, you don’t have room to adjust, or to hedge because trading is dynamic.
You’re in certain positions then you’re out of certain positions, you’re taking profits in one position, you’re taking losses in other positions and you’re constantly adjusting and managing your positions.
You’re trading these banana, apple, or grapes, whichever fruit is going bad, which ever fruit is going good, whatever ones you can get rid off, that’s what you’re doing in your trading it’s dynamic and you’re constantly making changes.
If you trade your full account and your full portfolio, you don’t have room to make adjusts, to run to the down side for a little bit in which case you can fully change and reverse things, if things are completely moving in the other direction.
Then when you start to roll over at least you have some of that hedging or protection on that short term run. Now you can do it in a whole different kind of equity, so for example if this right here was the, let’s say this was Apple.
What you could do is do the same thing in Apple and buy the puts or buy the vertical spreads for the bearish side or instead you can hedge it with something else. You can hedge it by getting something like on the SPX or buying the inverse of SPX, you know you can hedge it with the market, you can hedge it with the VIX.
There’s a lot of other ways I mean GOLD, you have the TLTs with the bonds. All those different ways are ways to just hedge things but you can hedge that portfolio and position, that’s really what it comes down is your hedging your full position.
And if you have a full position on with all your shares, you just won’t be able to use that capital because if you don’t have the capital to make the adjustment then you’re going to be stuck and you won’t be able to make that adjustment on your position if you don’t have the money in your account you won’t be able to make that adjustment.
Investing 100 percent
When is it that I actually go in and go in fully when you’re trading in the markets? So fully invested, so fully trading, I’m talking about you go ahead and put everything, 100 percent on the line, all your shares you take the margin out and you use the margin if possible and you even get your calls or puts and get your options.
So you put on everything right here, 100 percent in and working, so when do you do this? When do you go in fully all your shares, all your margins and options, it’s when you put and have everything in alignment.
The more things that you have in alignment, let me use a different color for that, so the more things that you have in alignment right here, if you have one thing in alignment, let’s say the stock is moving well.
Then the second thing is your technical analysis is moving well, the third thing is the market is moving well, if all these things are set up, these are all moving together and that allows you to profit and capitalize and it’s a straight line, it’s all moving together.
However, if you don’t have all these three things lining up, if these things are not all in congruence including the charts, where you look at the daily, you look at the weekly and monthly, all these charts if they’re all in alignment then that’s when you go much larger.
If everything is good to go and breaking then you can go in fully and the same thing when you start looking more and more at charts, so for example if with charts, you have something on the daily that’s hitting the support once and hitting that resistance.
Let’s say this is the resistance and it’s hitting it one time then coming back up hitting it the second time and then breaking through, you can go in but I wouldn’t go in with 2000 shares right away unless the weekly is also telling me the same thing.
Unless, the quarterly or the monthly chart is also telling me something because if they’re all lining up then I’m in fully but if you’re missing something on the weekly and the monthly and you only have the daily, if I only have one chart then I may only trade instead of 2000 shares, I may only trade 200 shares to see how things act.
I can trade 500 shares if I can normally trade 2000 shares, and then later I can get more into it but if I have weekly, daily and monthly, if everything is lining up, if the stock looks good, end of the market is powering higher as well then I may trade 2000 or 2500 shares plus margins and put on some options.
However, if I only have daily and weekly I’m going to trade a lot lighter. If I have daily, weekly and monthly on a stock but the market looks bad, if that market looks very unhealthy then I might trade a little bit lighter then I might only trade let’s say 1,500 shares or I might only trade 1,000 shares.
So it might be a little bit more than a 200 share or 500 share quantities but it’ll be less than taking out 100 percent of my account margin and options and putting everything on the line because I don’t have the market moving in my favor.
That’s kind of the simple way of that I look at when I’m putting on trades and positions is that I look at, ok what’s my total account and then what is the risk that’s involved, how many things are in alignment, what’s moving together.
Then I look at what I’m willing to risk, it could be experience, how is that setup, is that stock very liquid, or is the liquidity there. Am I able to get in and out of that stock quickly? And if I am then by all means if all the daily, weekly and monthly’s are lining up, if the stock, the technical, the earnings, the market, all looks good then you’re in.
Then you’re in and ready to go, you’re in the trade but if one thing is missing, if you don’t have the market moving to the upside but that stock is moving to the upside that means the stock is strong but the market is acting weak, so it can still pull that stock down so I may not go fully in because the market is weak.
I may just go in lightly and I may just go in a little bit because the market is not there.
You’re looking and gauging at all these things and all these parameters and you’ll slowly how these evolves and applies to your own personal trades because you have to have everything moving together if you want to go all in, if you want to go with margin or options.
Think of when to go all-in
Think about it, when does a poker player go all-in? It’s at that certain specific times when the probabilities and when everything is in alignment, when they feel that they have a very good chance, calculated good chance.
It’s not that they go in all-in with every single hand. You’re looking at what’s available, what’s at stake, what’s the risk, what’s the reward potential, so if you don’t have all these things lining up, if you don’t have everything lining up then why would you go full in, why would you go and take out margin and options.
I’ve seen people do it all the time, they’ll take out margin, you know they’ll trade options and they don’t understand what they’re doing and they don’t understand what they’re doing and the market is going in complete other direction and that stock is moving great on the daily but they don’t even have the weekly charts, the monthly chart and that whole sector is down but they’re trading that stock and they have their all account invested in this one stock because they believe in that stock, that it’s going to do well.
This is not the way that it’s going to work and unfortunately I’ve seen too many accounts being burned and too many people on the phone telling me “Hey, I’ve lost hundreds of thousands of dollars on this stock or on that stock” and it’s just not the right way to trade.
Be mindful of your accounts and positions. This is one of the reasons why they say don’t trade more than 2 percent of your account because this allows you to be a little bit more calm and patient when trading.
For me personally I think that if you’re watching your positions, you’re managing your positions you can definitely trade more than 2 percent of your account, it’s just you need to be mindful for the hedging, you need to understand that if things do not go in your favor what the risk is and what you’re going to do when you’re in trouble.
That’s really where it comes down to it’s understanding what you need to do if things do not move in your favor or if you get in trouble.
Hopefully I gave you some insight to the amount of shares, the quantities that you should trade and just looking at the markets in a little bit of a different way about your position sizing.
Of course this doesn’t really apply to everybody specifically on the 2000 share account; you’ll need to make those adjustments mentally based on the stocks you’re trading, based on your portfolio size and account size.
If you have a larger portfolio, if you normally think about trading 30,000 shares then of course you want to adjust these numbers as well.
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