Strategically trading stocks, bonds, and other commodities can boost your investment portfolio and earn you significant capital. However, you must understand the risk involved and determine the position size before making any trades. Learn how to calculate position size in stock trading like a professional in this guide.
As a leading prop trading firm in NYC, Black Eagle Financial Group understands the complexities of risk management. Discover tips from our experts about using a position sizing formula that will protect your assets and lead to successful stock trading.
Why Every Stock Trader Must Practice Risk Management
Before we dive into how to calculate position size in stock trading, it’s important to understand the value of risk management. Experienced traders know that every risk offers a reward, but if the losses continually stack against you, your portfolio will take a hit you can’t recover from. Mitigating the risk protects your assets and allows you to still see long-term rewards.
Let’s put this method into practice and look at two investors with wildly different approaches. Both operate with a 50% win rate but Trader A opts for a trade risk percentage of 20% while Trader B elects for a more conservative 2% risk. If a string of 10 trades begins with five losses followed by five wins, the two have significantly different account balances.
The 20% risk put forth by Trader A wipes out their entire account by the fifth loss. Trader B, on the other hand, will only lose 10% of their account thanks to their modest trade risk percentage of 2%. Trader B is on track to gain their loss back during the subsequent wins while Trader A has to scramble to earn more funds in order to start cashing in on the reward.
What Is the Ideal Stop Loss Level for Stock Traders?
Whether you’re wondering how to start trading or want to hone your expertise, you’ll want to aim for a stop loss level that won’t risk more than 2% of your account balance. The exact amount will vary for every stock, which is why knowing how to calculate position size in stock trading is so essential.
Say you have a portfolio worth $50,000 and purchase a stock at $150 per share. To minimize your loss, you can issue a stop-loss order when the price per share dips to $135 so you can protect your initial investment and keep more money to your name. The stop loss level may be closer to your original purchasing price if you only have $2,500 in your portfolio and can’t take bigger investment risks.
Steps for Determining Position Size for Risk Management
Managing risk as a professional trader will determine the longevity of your success and whether you see small, steady gains over roller coaster-like losses and profits. Learning how to calculate position size in stock trading will require a few key metrics but the formula remains simple. Below is a breakdown of steps that will help you find your stock’s position size.
1. Calculate the Total Risk Per Trade
Experts recommend trading conservatively and not risking more than 2% of your portfolio. This tactic allows for more versatile capital allocation moving forward and won’t hold you back after a string of losses. To turn your trade risk percentage into a measurable amount, complete the following steps:
- Calculate your total trading capital
- Assign a risk percentage
- Divide the total capital by your trade risk percentage
Say you have an account balance of $100,000 and decide to put a 1% risk on your trade, which comes out to $1,000. This is the total amount that you’re willing to lose on a single trade.
2. Figure Out the Share’s Stop Loss
A stock’s stop loss level plays a pivotal role in risk management. To stick with whole numbers, let’s say you purchase a stock at $100 a share and set a stop-loss order when the price dips to $80 per share.
3. Use Those Figures to Determine a Stock’s Position Size
Now that you have your total risk and stop loss figures, you can figure out your trade’s position size. Start by subtracting the stop-loss amount from your stock’s original purchase price. Then divide your total risk by the stock’s risk.
Let’s use the following example metrics to see this formula in action:
- Account balance: $100,000
- Trade risk percentage: 1%
- Risk per trade: $1,000
- Stock purchasing price per share: $100
- Stop loss price per share: $80
Subtracting your stop-loss price ($80) from your original share price ($100) leaves you with a $20 loss per share. Dividing your risk-per-trade value ($1,000) by your $20 loss per share gives you a final position size of 50 stocks allowed per trade.
Knowing how to calculate position size in stock trading using this formula will make it much easier to figure out how many stocks you should sell at a reasonable price without the move affecting your portfolio. Working with a prop trading firm like Black Eagle Financial Group gives you access to custom reports that detail key metrics like capital allocation, position size, and more. Once you have all of this information at your disposal, you can develop a proven strategy for successful trading with little risk.
Other Forms of Risk Management in Stock Trading
Calculating position size certainly helps minimize risk when trading stocks. However, it’s not the only strategy you can use to your advantage. Experts recommend the following methods for effective risk management:
- Diversify your assets: Fill your portfolio not just with stock investments but other commodities to avoid the risk of a highly volatile market.
- Invest in global assets: Consider expanding your investments beyond U.S. markets and focus on other markets for greater reward opportunities.
- Prioritize the risk-reward ratio: Focus on how much you can potentially earn by taking a trading risk. This directly impacts a stock’s position size when you sell to avoid a larger loss.
Executing these strategies will help you build a portfolio that can experience gradual growth because of the limited risk.
Elevate Your Trading With Black Eagle Financial Group
Practice the tips in this guide to watch your assets grow long-term as a Black Eagle Financial Group client. Knowing how to calculate position size in stock trading can give you a leg up on all of your trades and effectively manage risks so your portfolio remains robust.
We’ll help with everything you need to know about trading leverage so you can see continuous success in your trades. Professionals are always available to offer support and assistance.
Do you want to take your finance expertise and showcase it as part of a proprietary trading firm? Reach out to Black Eagle Financial Group today at +1 (833) 253-2453 to get started. Request more information now.
