How to Manage Penny Stock Position Sizes
Managing position size is a tricky task. If you have a small account, you can only have a few positions. When your account gets bigger, you will be able to buy more stocks and trade more.
Here are a few ways on how you can manage your position sizes.
Position Size By Trade
You can divide up your account and trade every stock with the same position size. For example, if your account is $15,000, you can trade 10 stocks with a position size of $1,500 for each stock.
You can slowly increase your position size as your account gets bigger. For example, if your account grows to $20,000. You can either buy 10 stocks with a position size of $2,000, or you can buy more stocks with a smaller position size.
If you are just starting out and have less than $5,000 to trade with, you can read the following article on how to grow a small account.
How to Grow a Small Account With Penny Stocks
Position Size By Performance
There will be times where you will be on a winning streak. It seems every stock that you buy goes up and every trade you make grows your account. During this time, you may consider increasing your position size.
For example, let's say your normal position size is $1,500 for each trade. When you are making profits consistently during a good month, you can increase that to $2,000 or even more. If you made a profit of $1,500 on a trade, you may even add that profit to your regular position size on your next trade.
However, if you start to lose money or when you feel your winning streak is over, you should cut down your position size and go back to your regular position sizes. Always keep in mind managing your risks should be the first priority in trading, profit is next.
By the same logic, when you are on a losing streak, you should cut down your position sizes. If your normal position size is $1,500, you should cut it to $1,000. If you are still losing, you should take a break from trading for the rest of the month or for a few weeks.
One thing you should never do is to double down or increase your position when you are losing. Many beginners tend to do that. When they lose $1,000 on a trade, they increase their position size on the next trade trying to make their money back.
This kind of mentality is very dangerous and won't get you very far in trading. The market doesn't owe anybody any money, it doesn't know or care if you are losing money. So always cut down your positions when you are losing.
Position Size By Pattern
When you have a small account, let's $3,000 - $5,000, you want to focus all your effort and trade on one or two patterns.
After you have grown your account from $5,000 to $15,000, you may have already found multiple profitable patterns. Some patterns might work better than others.
Let's say you have found a pattern that works about 90%, you want to trade with a larger position with that pattern than a pattern that works only 70% of the time.
Of course, you will still need to have stop loss even with your best pattern. A pattern that works 90% of the time will still fail 10% of the time. You do not want that 10% of the time to ruin your portfolio and crush your confidence.
There are two strategies to enter a trade. Let's say your position size is $2,000. You can take the whole position or a partial position and then add on to it at a later time.
For example, when you see a pattern that looks like the profit pattern that you have found, you can buy $2,000 worth of shares of that stock, or you buy only $1,000 and then add $1,000 once the stock starts to go up.
There are both pros and cons to each approach and it really depends on your strategy. The pros of taking a partial position are that you can test the water and see if the trade is working before adding more shares.
The cons of this approach are that you will end up paying more in the average price for the stock.
You can test out both strategies and see which one works better for you.
The same thing goes for an exit strategy. Once you have hit your profit target, you can gradually exit the trade, or you can sell all your shares at once.
Let's say if you bought a stock with a position size of $2,000, the stock then gapped up 100% a few days later, you can exit half of your positions at market open, and let the rest of your position ride with the stock.
Again there are both pros and cons with this strategy. The pros of this strategy are that if the stock pulls back, you have already partially locked in your profit and it would be easier for you to exit the trade with your remaining shares.
On the other hand, if the stock continues to go higher, you are missing out partially on the profit since you've already taken partial profit at the market open.
Please note, the partial exit strategy can only be used when you are making a profit on a trade. If you are exiting a trade because your stop-loss has been hit, then you should exit your whole position instead of partially.
In this article, I've shared some of the strategies that I use to manage position sizes and entering and exiting a trade. I don't always use the same strategy for every trade.
I routinely mixed the strategies depending on how I feel about the stock. Sometimes, following one strategy gives me better results, sometimes it doesn't. You can test them out and see which strategy works the best for you. Take notes, track your trades and optimize your trading strategy as you gain more experience.
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