If you’re new to trading and working with a small account, this post is for you…
It’s time to break down an essential topic for anyone learning to trade the stock market: position sizing.
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For new traders, one of the most common mistakes is taking on too large a position size…
Have you ever found yourself getting emotionally attached to a trade? This usually happens when your position is too big.
You might take a quick profit at the first sign of green — even if it’s just a measly $50 — because you’re nervous about losing your precious gains.
On the flip side, if you don’t take enough risk with a small account, you’ll never grow it.
As you can see, position sizing is crucial, but it’s also a delicate balancing act…
Today, we’ll cover four crucial tips for managing position size. I’ll explain how many shares to buy, how much of your account to use, and more…
Tip #1: Use a Significant Portion of Your Account
The single most important tip I can give is to use a substantial portion of your account on each trade.
However, don’t use more than 50% of your account on any single trade. This approach allows you to make meaningful gains without risking everything.
But this goes against some of the prevailing wisdom. Some advice might tell you to only risk a small % of your account on each trade, but I don’t agree…
For traders with small accounts, you must focus on repeatable patterns in hot sectors, and then get aggressive when you find them.
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For those with margin accounts, use only your cash buying power and avoid using margin until you’re more experienced.
Think of margin like a dangerous power tool — it’s useful but can cause significant damage if you don’t know what you’re doing.
Tip #3: Keep Some Reserve Buying Power
Don’t use 80-90% of your account on a single trade. If you do, you might miss out on other opportunities.
It’s crucial to let your winners run. But if you’re all-in on one trade, you might be forced to sell a winning position to jump into the next trade.
The key is to keep your position size consistent. Add to your winners and cut your losers. This can be challenging under the Pattern Day Trader (PDT) rule, but it’s essential…
Never average down into a losing trade because this breaks your risk management rules and increases your potential losses.
Keeping some reserve buying power helps you stay flexible and ready for new opportunities.
Tip #3: Do the Math
Always do the math to determine your position size. Use position size calculators or do it manually. Consider the daily range and volatility of the stock.
For stocks with extreme ranges, you might need to use even less than 50% of your account.
But if you’re trading stocks with smaller ranges, you’ll want to enter those positions with your maximum risk tolerance.
Adjust your position size to ensure you can handle the stock’s movements without getting stopped-out prematurely.
If you still need more help, join us in the Daily Income Traders community. It’s live, 100% free, and we discuss position sizing every day.
Tip #4: Understand Your Broker’s Fees
You’re probably familiar with commission-free trading platforms, which are great for beginners.
However, as you progress, consider moving to a paid broker for better execution and additional features.
Understand your broker’s commission schedule and fees, especially if you’re trading on margin or shorting stocks.
Hidden fees can eat into your profits, so it’s crucial to be aware of them.
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Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade
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