|
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.
| 
