Reader Joe asks:

Gary,

Curious...how do you determine your position size? Do you have a set size that you work with?

Thanks

Joe

Joe, there are two parts to determining position size.  First, you need to estimate how many positions you’ll likely have open at any one time.

Second, you’ll want to determine how much leverage you’d like to employ.

Then, position size becomes a straightforward calcution: ((Current equity * leverage)/ average positions open)/stock price.

Let’s use an example. Say I start with $50,000 equity and I’m going to use my full leverage of 200%.  In addition, I find I normally have 5 positions open at any one time.  Finally, the stock price of my newest candidate is $50.

Therefore: (($50,000 * 2)/5)/$50 = 400 shares at $50. 

If – on a mark to market basis – your equity drops, you simply employ less equity per trade.  If it – hopefully! – increases, you employ more equity per trade.