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# stock price and position sizing

Discussion in 'Risk Management' started by clarodina, Jul 5, 2010.

1. ### clarodina

how to balance different stock price volatility using position sizing?
if u are buying 2 stock A is \$1.10 and the other B is \$29.30 the dollar movement of the A if definitely smaller than B but in % A has bigger % change than B. How to determine how much to allocate to each stock so that the equity swing of each stock more or less balance?

2. ### Retief

Keep it simple. Allocate the same amount of money to each stock, say \$5,000 for a \$100,000 account. If A goes up 10%, you make 10% on your five grand and the same for B. If the stock goes to zero, you lose 5% of your account.

If you want to complicate it, you can adjust for volatility. Allocate \$5,000 to each stock and then divide by some variant of the ATR so that position size is reduced as volatility increases.

3. ### clarodina

Often the % move of A is 10 to 20% while B is 2 to 3%

Allocating \$5k to each stock or dividing atr would not balance the equity swing of A and B

you adjust it according to the volatility...

and you set your max risk in dollars for each trade to be the same

total risk capital = \$10,000

max risk per trade = 3% of capital

\$1 stock with 20% volatility ( .03 * total capital) / .2 = \$1500 in the position

= 1500 shares

\$50 stock with 10% volatility ( .03 * total capital) / .1 = \$3000 in the position

= 60 shares

your dollar for dollar risk is the same given the volatility.. obviously when markets go down, things start to become highly correlated, and the volatility starts to match up so you would need better risk control than this at some point - portfolio level max risk, or using uncorrelated asset classes, strategies, etc.

5. ### clarodina

How to measure stk volatility consistently? Tried using atr or absolute roc but they are all historical and varies alot. A might be 20% and B 10% and forwardly A might be just 3% and B 20%. The volatility does not seems consistent