LESSON - POSITION SIZING -

I think this lesson is well overdue and recently it has been highlighted again that position sizing needs to be understood with more clarity.

It is one of the most critical yet often overlooked aspects of successful investing

It's not just about what you buy, but how much of it you buy.

Why Position Sizing Matters:

• Risk Management: Your number one job as an investor is to protect your capital. Position sizing is the primary tool to ensure a single bad investment doesn't wipe you out.

• Consistent Returns: By carefully sizing positions, you'll avoid emotional decisions driven by fear or greed, leading to more consistent performance.

• Optimised Gains: Position sizing lets you capitalise on high-conviction ideas without overexposing yourself to risk.

Core Concepts:

• Risk Tolerance: This is personal and fundamental. How much of your portfolio are you comfortable losing on a single trade? Common starting points are 1-2% of your total capital.

• Position Size Calculation:

  • Determine your risk per trade: If you have a $100,000 portfolio and a 1% risk tolerance, your maximum risk per trade is $1,000.

  • Identify your stop-loss level: This is the price at which you'll exit the trade if it goes against you. Let's say your stop-loss is 10% below your entry price.
    
    (NOTE - I personally do not use Stop-Losses because I only buy positions that I am happy to hold but I am the one who has done the research, so I am happy that once I have bought, I will hold for long term, it is much easier to hold a position when you yourself has done the research, which you know has helped you in the past, I use the same methodology when assessing all stocks and the vast majority of these assessments have been in my favour.....that being said, if you get comfort from setting a stop-loss, it is a great resource to limit any downside variables that you can not control....but I urge you not to set a tight stop loss, the masses always set -10%, so -15% would be more suitable, so you are not raided by market makers.)

  • Calculate your position size: Divide your risk per trade by the stop-loss percentage: $1,000 / 0.10 = $10,000. This is the maximum amount you should invest in this position.
    
     - $10,000 is the normal amount I like to start a position, I increase that position size once the impulse wave is confirmed and moving in the direction we expect, so as the risk reduces, our position size can increase.

• Advanced Considerations:

  • Volatility: Adjust position sizes based on the volatility of the asset. Risk less on volatile investments and more on stable ones.

  • Conviction: If you have very high conviction in an idea, you might slightly increase your position size, but always within your overall risk parameters.

  • Diversification: Don't put all your eggs in one basket. Even with perfect position sizing, one catastrophic event can still hurt your portfolio.

Practical Tips:

• Review and adjust: Your risk tolerance and market conditions change. Regularly reassess your position sizing strategy.

• Avoid the "double down" trap: Don't throw good money after bad. As we have said a number of times in this group, add to your winners, not to your losers.
  

Example:

Imagine you're interested in a tech stock trading at $50. You believe it has the potential to reach $60, but you're also aware of the risk. Your stop-loss is $45, a 10% drop. With a $50,000 portfolio and a 2% risk tolerance, your maximum risk per trade is $1,000.

• Position Size Calculation: $1,000 / (50 - 45) = 200 shares

• Maximum Investment: 200 shares * $50/share = $10,000

Conclusion:

Position sizing is not glamorous, but it's the bedrock of risk management and long-term investing success. By mastering this skill, you'll make more rational decisions, protect your capital, and ultimately achieve your financial goals.

We have a common exercise in this group where we split our total allocation into a new position into 5 parts.

First Buy: Once the price breaks out and initially holds support (Wave 1)

Second Buy: On the retest of support (Wave 2)

Third Buy and Fourth Buy.: Moving up Wave 3, usually in Subwave 2

Fifth Buy: I normally keep this for the unknown, a sudden pull back or variable we can not control, usually a retest of the initial breakout level.

I hope this help folks.

I will continue to add Lessons by learning from the groups needs, this has helped us in the past to progress.