Stock market gains don't come in a steady line. There are times when the gains are quick and large. Other times, activity is light and your equity is flat or drifting down. Swing tradingis all about taking quick gains and keeping losses small. If you combine that with proper position size it can lead to impressive performance.
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Position Size And Performance Calculations For SwingTrader
For SwingTrader performance, we use a model portfolio. To keep things simple, eight full positions of equal weight put us at 100% invested. It's a number suggested by IBD Founder William J. O'Neil in his book "How To Make Money In Stocks." That means a full position starts out at 12.5%.
We use the prior day's portfolio value multiplied by the position weight. For a starting portfolio size of $100,000, a full position is $12,500. With gains, the dollar amount of the position size will increase but the weight remains the same. Alerts sent to subscribers, include the price at the time of the alert. These serve as our entry and exit prices and allow us to calculate the number of shares for the model portfolio.
Use Smaller Positions To Reduce Risk
But a full position might not always be appealing. Consider two levers that determine proper position size. There is the percentage you are risking for the individual trade and the risk to your portfolio.
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The stock might be more volatile or the move up so sharp that the logical stop is further than you'd like. If you have a swing trade with a larger risk percentage, it's advisable to pare your position size. With the coronavirus stock market crash, we've seen less favorable market conditions. Reducing the risk to your portfolio makes sense since the chances of failure are higher.
In either case, our simple solution is to use a partial position size, usually a half position. Whenever such an adjustment is made, we send out a custom notification first alerting subscribers to our altered position size. These are available through desktop notifications or the SwingTrader app.
The Number Of Positions Also Matters
Stock market corrections should also see reduced trading. Fewer trades means less money invested and less money at risk. A falling batting average is a good signal to trade less.
Even in a good market you might find that you aren't fully invested. Taking partial profits on the way up will naturally reduce exposure. If you can't find proper trade setups, you might find you aren't replacing closed trades with fresh ones. The result will be a portfolio that is less than fully invested. It's illustrated in the chart above where the percent invested is below 100%.
On the flip side, with a strong market you might find yourself with more than eight full positions at a time. In our model portfolio, that would be using margin.Margin is the use of stock positions as collateral to borrow money from your broker. It's a way to increase your buying power in favorable conditions. In the chart above, you can see where the percent invested was over 100% when the market was the strongest.
Your Position Size Might Vary
Again, we try to keep our calculations simple and conservative. A 12.5% position size is what you would expect with a 4% risk for the trade and only half a percent risk to the portfolio. A smaller risk percentage would allow for a larger position size. Or a more aggressive risk tolerance for your portfolio could also see an increased size. The position size calculator available on SwingTrader helps you make the proper adjustments. Aggressive position sizes used properly could create even more opportunities for strong performance.
Market analysis, position size tools, trade ideas with alerts and past trades are all available to subscribers and trialists to SwingTrader.Free trials are available.
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