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!