"Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I'm getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis." ---- Bruce Kovner
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A reader e-mailed me asking how I set position size, position stops, etc., so it may be beneficial for me to tell you about that.
My approach is essentially what Bruce Kovner describes above, with some variations.
Ok, first I determine how much I am willing to lose on a trade if I'm wrong, and that is almost always not more than 1.00% of Equity.
Too tight?
It works for me, but you may have a better method that works for you. And it's essential that you find a methodology that fits your psyche.
So, anyway, let's say your Equity level is $1 million. Maximum loss allowable under your system is 1.00% or $10,000 per trade. Assume that XYZ Corp is trading at $90/Share, and based on the chart formation, $86 is the Stop for a maximum loss of $4/Share.
Conclusion: you want to buy 2500 shares, or $10,000/$4.
That is the template, but there are infinite variations and shadings for different situations.
For example, I usually carry about 5-7 long positions often offset by short positions, so that influences the size of holdings.
And so does Beta, leverage, and other factors, but the point is that I start with that 1.00% of Equity Stop and go from there.
I hope that is helpful, and now on to today's action and some Charts.
Tonight I'm noticing that some of the Notorious Predictors who read entrails and talk about the markets for a living, are saying that today's vicious reversal is the stake in the heart of the nascent Bull.
Yes, of course they've been predicting that for weeks and, yes, they could be right, but no, I refuse to bet a dime on the nonsense from these Grifters.
I try -- not always successfully but I try -- to let the action of the market guide me, and for the moment this is just a bump in the road. If things get ugly, I'll drive right off that road and consider a change in strategy, and you'll be the first to know.
In the meantime, some charts with comments attached follows. Have a restful evening and I'll see you in the morning.
Stephen
KB Homes.....click to enlarge
Sears Holdings
Abercrombie & Fitch
Coach
Google
Chemed
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