Quote from jwcap:
I have a 50,000 account and I use the formula on proper trade size as:
Risk - Commission / Difference between entry and stop.
Makes sense but then I was looking at trading some JNJ. Here's how it would come out.
$500 - 4.95 commission / 0.47 (based on average ranges I am using)
this gives me a trade size of 1053 shares. The problem with that is I would be buying ~$71k worth of stock
It is a margin account but that's just for one position. How do you deal with this?
I use the lesser of;
1) Account size divided by target number of positions divided by share price (incl commissions both ways) or,
2) Allocated risk divided by value of stop loss.
Target number of positions - I usually work with 7 or 8 as I want diversity in my trades, likewise I would not trade more than 2 strongly correlated positions like banks, even if all banks are moving.
Allocated risk usually from 0.75% to 1.5% of total account value. If I'm trading well and making good calls, it's at the upper limit. If I'm not then I scale it down.
One more criteria is total amount at risk, which I set at 10% of total account value, but reduce to 6 or 7% if the market is choppy. This automatically controls the maximum number of positions I can trade depending on allocated risk per position.