How Many Shares Should I Trade
A common question from many day traders and swing traders is, how many shares should I trade?
First, you need to determine how much of your trading capital you want to 'invest' in any one single trade. Refer to the old phrase 'never put all your eggs in one basket' as you should never invest all your trading capital, in one single trade.
If you used all your trading capital on one single trade, you have no additional trading capital should another potential trade come available. Should a trader decide to 'not' take a pre-determined stop on a position, they not only become an investor in a losing position but also, they have no additional trading capital to trade with so, they are out of the trading game. A trader is more likely to react under duress if a trade turns against them if they used up all their trading capital on one position. Depending upon the amount of trading capital a trader has in their trading account, they should consider dividing the amount into equal blocks, per potential number of stocks they may hold a position in, at any one given time. Traders should consider holding back some of their trading capital and not trade it all away. Just because you have capital sitting in your trading account does not mean you have to hold open positions, at all times.
When trading stocks, traders should determine the number of shares to trade dependent upon the price per share, volatility of the particular stock, market conditions and the max amount you are willing to lose on any one single trade. Many traders search for lower priced stocks because they can buy/short more shares. Sure, if a trader holds more shares and the stock moves a point/one dollar, they will make more than if they were holding fewer shares in the same stock. However, when a trader gets caught up in a fast moving position holding more shares, should that position turn against them, their loss can easily surpass their pre-determined stop, amplifying the loss on that trade. Additionally, holding a larger position with more shares, a trader should be running with a tighter stop loss.
Example A: Position of 1000 shares of a $5 stock, short term investment of $5000, a stop loss of 50 cents or half a point would mean the trader will face a potential loss of $500 if the stop loss was hit and taken by the trader. Running with a 50 cent or half point stop loss is considered a very tight stop loss – the position has no room to breathe. Generally, lower priced stocks do not have the same volatility and momentum that higher priced stocks do therefore, traders are more likely to 'get stuck' in a lower priced stock.
Example B: A position of 100 shares of a $50 stock, short term investment of $5000, a stop loss of $1 or one point would result in a potential loss of $500 if the stop loss was hit and taken by the trader. The wider stop allows more breathing room for a position of fewer shares, with the same stop loss as Example A
In summary, the number of shares traded per trade should be determined even before a trade is considered. Traders should consider putting together a trading chart consisting of number of shares that can be traded, per a specific price per share, stop loss to run with on that specific number of shares in addition to, the potential gains the trader is aiming for. Gains can be calculated by general amount of profit based on how many points or portions of points the trader is aiming for. Potential gains can also be determined on percentage of trading capital used, on any one given trade. Stop loss remains the decision of each individual trader.
A traders chart could look something like the following in the format of your choice: Share price, # shares to trade, max short term investment, stop loss calculator (price, #points, %trading capital used, etc.) and risk tolerance.
Creating a chart similar to this will enable a trader to determine at a glance, the size of position they can potentially hold.