Market Talk with Piranha is currently moving to its new home at chrisperruna.com. The new site is up and running but many of the posts need editing as the images and stock charts did not transfer successfully (thanks blogger). I will post all new entries to both blogs – Thank you for your patience while I make this change!

Monday, February 20, 2006

Position Sizing & Risk Management

One of our fellow MSW community members wrote a great article on his blog about position sizing and I wanted to bring it to everyone’s attention:
Risk Management - Position Sizing

His main page can be viewed at:

Trend Following with CANSLIM

Since I am on the topic of blogs, I have been meaning to invite the community to read Jon Tait’s blog, Fickle Trader, someone I have formed an “investment relationship” with over the years. We met on the Richdad forums and have kept in touch ever since (we have some great conversations through e-mail about trading). He may refer to me as his mentor (way too much flattery) but I am sure he will be mentoring many more than I in the future while making (trading) his millions in the market.

Below is another simplified example of a specific position sizing method (for further reading on the subject, visit the book by Van K. Tharp that I mentioned on a recent post titled Sound Money Management Key in Trading:

Example:
Let's say you have $100,000 to invest and you're using the 1% risk model to guide your investments. If you're using a 25% stop loss, you could buy $4,000 worth of stock and risk $1,000 ($1,000 is 1% of $100,000).

In the example above, you placed 4% of your portfolio into the stock and set a 25% stop—risking just $1,000 of your money (since $1,000 is 25% of $4,000).

Some investors use even tighter stops, in the 10%-15% range.

If you're using the 1% risk model with a 10% stop loss, you could buy $10,000 worth of stock. You have the same dollar amount at risk ($1,000) as the first example - but you're allowing the stock less room to go down before you sell.
Written By: Brian Hunt

Piranha
p.s. - keep in mind that the markets are closed today!

6 Comments:

At 12:13 AM, Blogger Jim said...

Thanks for the kind comments Chris. I've had the fortune of meeting Jon in person several times. He is extremely sharp and I've learned a lot about the markets by talking to him. Not quite as much as I've learned through your website... but close. Thanks again,

Jimmy

 
At 3:35 PM, Anonymous Anonymous said...

Hey Chris,

This post is great. It has really helped me to comprehend the concepts of risk management. I had one question though. Do you advocate holding relatively few investments (5-8) or more? I noticed that in the example with the $100,000 portfolio, the amount of capital used on a single position was $4,000. This would equate to roughly 25 positions in all. Do you think it would be smarter to invest more capital in fewer positions if you are only starting out with, say, $5,000-10,000?

 
At 5:36 PM, Blogger Chris Perruna said...

I posted a response to your question. You must understand that position sizing is directly correlated to the stop protection that you have incorporated into the equation. Check out the examples in the new post and see if you can follow the changes in position size when related to the stop loss in each example. The tighter the stop loss, the great the number of shares you can handle.

Hope this helps

 
At 6:10 PM, Anonymous Anonymous said...

Thanks Chris. Great explanation.

 
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At 7:12 AM, Blogger The Money Paradise said...

nice. thnaks

 

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