As a learner and a small time investor, I have so much to learn on the share trading subject. Even my masters of Commerce studied seems to be easier, or is it maybe my mind getting weaker over time?
Ok, market is a bit better today, most shares are on the green zone, and I think it's a good time to start looking around for bargain stock again. My first thought is on AMP, but I am not sure if I can afford to buy a decent amount of it with my leftover cash. It was down quite a bit from before the sell off, but then it started to bounce back up again.
My question is: Is there a method to determine the size of trading? I could buy a few of AMP, I suppose, but will it worth it?
Searching on the net, found so many post about position sizing. From a very simple to the sophisticated ones.
I will start from the simplest one: (I extracted this method from an article on this link)
Position sizing is the calculation methodology that you use to determine how many shares you will buy or sell to open each new trade. This alone is the single greatest contributor to your profitability in the market place.
When you close a trade, you will have made a certain dollar profit on every share you bought or sold when entering the trade.
Therefore your gross profit on the trade in absolute terms is:
$profit per share * Number of shares in the trade = Gross $ profit for the trade
Minimum Trade Size – When is a trade too small?
Your net profit per trade, the amount that enters your bank account, can only be calculated after you subtract the effect of brokerage from your gross profit.
Net Profit per trade = Gross Profit – Brokerage (Both in and out)
In order to avoid the scenario of losing money after brokerage, you should consider having a minimum trade size. Your minimum trade size is the smallest $ value for a trade that you will take.
How do I calculate it?
Avg brokerage per trade / Avg % profit per trade = Break-Even $ Trade size
Your minimum trade size is a $ amount that is greater than your Break-Even $ Trade size
Example Average brokerage rate = $27.45 per side or $54.90 for a completed trade
Average % profit per trade (from your backtesting results) = 10%
Break-Even $ Trade Size = $54.90 / 10% = $549.00
Therefore if you were to enter a trade with $549.00 and you made your average profit of 10%, you will have a gross profit of $54.90 ($549.00 x 10%). Subtracting your brokerage of $54.90 leaves you with a net profit of $0. A break even trade.
Hence your minimum trade size is a $ amount that is greater than $549.00 (your break even trade size). As long as you enter positions equal to or greater then your minimum $ trade size you will be able to close trades and have a profit both before and after brokerage.
A bit too simple, isn't it?
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