I've been thinking about entering positions and the position sizes themselves recently. I have a question. Let's say I have a system where I want to use my capital such that each position size is 1/20th my capital. For arguments sake, let's say I have $100k and therefore each size is $5k. This means I can take 20 positions. I have this lovely trending stock that's appeared on my buy signal list. I want to enter the trade at $5.50, and put a stop at $5.00, so a risk of $0.50. I want to risk no more than 1.5% on any trade, therefore my risk is $1500. This means 1500/0.5=3000. So I can buy 3000 shares. However, 3000 shares at $5.50 puts me at $16,500 for the whole 3000 shares. I only want to use $5000. Buying $5000 worth at $5.50 gives me 909 shares, but then with 909 shares my risk goes down to about $500 and 0.5% risk [$=909*0.50 = $454.50; (454.50/100000)*100=0.45%]. Is there a way to do what I want to do? How do I keep the 1.5% risk but only use $5000? Or is it totally fine to just drop the risk% in such cases?
there's no much you can do if you say you don't want to risk more than 1.5% and no position can be more than 5% of total port value. try just buying $5,000 of the stock and set a stop of 1.5%.
The way I handle it is the 1.5% risk is the maximum I will accept. So in your example I would buy 900 shares and accept that the risk on that trade would be about 0.50%. Also, I usually set a max number of positions at 8-10, as diversified across sectors as is logical and possible. My logic is I prefer to target and focus on the best opportunities, rather than spreading my efforts too thinly. But that is really a matter of personal preference, there is no right answer.