Quantity matters, and just the right quantity matters more. What is the position size calculator for stocks? A lot of financial analysts now say that for an investor, the correct position size of a stock, which is the number of shares of a stock or security you invest in, is more important than price levels where they enter or exit a trade, particularly in day trading. The reason is simple.
Size Determines Risk
If your position size is too limited or too wide, you may end up taking a lot of risks or end up taking not enough for you to profit from a trade. Moreover, the number of shares you have is pretty basic to a favourable deal. Even if your bets go right, but you do not hold enough security, you stand to lose. So you need a position sizing calculator in place.
Two types of risk need to be managed by setting the appropriate position size-trade and account risk.
What Is an Account Risk Limit?
Here, you set a percentage or certain specific sum as a limit for the risk you are willing to take per trade. So, for example, if you set a percentage risk limit at 1% and you have Rs.50,000 in your day trading account, then you are willing to risk up to Rs.500 per trade. Experts suggest the account risk limit should be kept unchanged and the same for all the deals.
What Does Trade Risk involve?
Trade risk is the band between your entry point in a trade and your stop-loss levels. When you set up a stop loss at a particular price, what happens is when the prices breach the said level, stop loss is triggered, and your position is cut out. This is important in setting the right positioning size because if the stop loss is kept to close to the entry point, you may end up losing out on profit opportunities when prices recover. If the stop losses are placed too far apart from the entry point, you may lose out a lot of money before you realise the prices may not recover soon.
The Ideal Position Size For Trade
The ideal position size for a trade is determined by dividing the money at risk or account risk limit by your trade risk.
Ideal position size for trade=account risk limit/amount of trade risk
Taking forward the example we considered in the first section,
The total account size is Rs. 50,000, and you set the account risk limit per trade at 1%. That is, Rs.500 per trade is your money at risk.
Now suppose for stock XYZ, you entered the trade at Rs.30, and you set up the stop loss at Rs.20, then your total amount of trade risk is Rs.10.
So, the ideal position size for the trade would be: 500/10
That is 50. So your ideal position size or the number of shares of security XYZ can be 50 given your risk appetite.
Position sizing of your trade is as important if not more than at what levels you buy or sell. To fully profit from a deal, it is important to know how much of a company’s stock is adequate to have in your basket of stocks.