Fluid Position Sizes | Podcast Episode #475

0:00

Hey everybody. This is Ryan Mallory with shareplanner.com. Swing Trading the Stock Market and today’s episode we are going to talk about fluid position sizes. Now this is something that I’ve not really talked about before in the past. And the reason why I’m talking about it now is that it came up in the trading block as a question.

0:17

And when I was answering, I was thinking to myself, man, this would make a really good conversation for the podcast. And that is approaching the market with fluid position sizes, meaning like, I’ll throw this amount of money on this trade and it might be something completely different for another trade that’s fluid position sizes.

0:35

And that’s what I want to talk about here today. So the question that was asked, it was a little bit different than that, but that this is the question that spawned this discussion about fluid position sizes. And he was asking me, he’s like, Ryan, I am curious about how you handle position sizing. I know you mentioned in the past that you use a 16% of your account on each trade.

0:54

Curious as to how that is calculated. You take into account the stop loss and then size it that way. So what he’s asking there is what a lot of people do is that they will and I and I don’t agree with this approach, but what they do is that they approach the stock market with the idea of like, OK, on each trade I’m willing to lose up to 1% of my account value if I’m wrong.

1:17

So if they have $100,000 account, they’re willing to lose $1000 on that trade, 1%. So if they have a really tight stop loss, that’s going to give them the ability to wager a lot more on the stock.

1:34

So if you have a 1% stop loss, you can go way out there versus if you have a 10% stop loss, yeah, you can still take the trade because in your mind you’re only risking 1% of your account, whether it’s a 10% stop loss or a 1% stop loss. But on the 10% stop loss, it’s going to be a much smaller amount that you’re risking on the trade.

1:58

The problem with that is, let’s say for instance, you were using a three to one inverse ETF. And a lot of people use these. I’m not as crazy about them. They really have to be the right circumstance for me to be able to use one. But let’s say in this particular case you have $100,000 account, you have a a, a trade setup in TQQQ that you really like.

2:21

That’s a three to one inverse or three to one ETF, leveraged ETF of the NASDAQ 100. So the NASDAQ 100 goes up 1%, you go up 3%. If it goes down 3%, you go down 9%. In this particular situation, you’re going into it with a 1% stop loss.

2:40

That is very hard to do with it inverse ETF, but bear with me for the sake of this example. You go into it with a 1% stop loss and you’re saying to yourself, OK, I’m willing to risk up to 1% of my capital. And let’s say for all intents and purposes, you know you have 50% of your portfolio on this particular trade because you’re able to to trade with such a tight stop loss.

3:06

Well, you hold the stock overnight, or this case the ETF, you hold it overnight and it gaps down 3%. Consider this trading environment that we’re currently in where we have seen a lot of gaps to the downside very possible. And so you get that gap down of like 3%.

3:23

Now all of a sudden you’re down on TQQQ 9%. So 3% gap down on the NASDAQ, 9% gap down on TQQ. You have 50% of your position at risk. And I don’t even know, I’d have to do the math to, to, to determine what the right amount would be.

3:38

But I guess if you were doing a 1% stop loss, you could do like up to 100% of your portfolio. You put the whole thing on there, right? But in this case, let’s say you didn’t want to be quite that aggressive. Like you had a cap of about 50% of your portfolio.

3:54

Yeah, 50% of your portfolio. Instead of being down 1%, now you’re down on the trade because it didn’t work out. You’re down 4 1/2 percent. That’s where you know, sizing your position sizes according to the amount that you’re risking on the overall trade is dangerous because you’re not accounting for the gap downs.

4:12

You’re not accounting for the fact that a stock could be downgraded or that you could have deep seat come out and you’re that position that you have in NVIDIA is now down 15 or 16%. You have to take into account the, the, the headline risk. So for me, I don’t trade that way.

4:28

I, I just go into every trade saying I will risk 16% of my swing trading portfolio on a single trade. So when I’m doing that, my losses will be different in size. So if I have a three percent stop loss on one trade and a 5% stop loss on another trade, it’ll be different in terms of the amount that I could possibly lose.

4:53

But what I also won’t be doing is like chasing after a trade that’s a 10% stop loss because that goes beyond what my risk parameters are willing to tolerate in terms of my emotional well-being. I’m not going to, you know, risk 10 or 15% on a trade. So I can, I, I pretty much standardize the extent of how much or how wide my stop loss is going to be relative to my entry price.

5:18

That’s how I approach it. Now, the fluid position sizes, and I think this is where a lot of people can get themselves into a lot of trouble is a shoot from the hip mentality. And I don’t think that that shoot from the hip mentality is ever good because in this case, what you’re doing is you’re making a secondary bet on the trade without you even realizing it.

5:37

You’re making making a bet on the market of what you think that stocks going to do and you’re introducing as a result. You always hear me say don’t put variables on into the market that is not necessary like for an instant saying I need this trade to go up because I need to pay for my mortgage at the end of the month.

5:55

That’s injecting a variable that has nothing to do with stock trading. And in this case, you’re also injecting a variable when you’re shooting from the hip and using fluid position sizes because you’re saying, hey, I think this stock is going to go go up pretty good. I’m going to put a little bit more against the straight.

6:11

Instead of 16%, I’m going to put 25% on this trade. Or you may not have as much confidence on the trade and say this is a little bit of a crazy stock. I’m going to just put it like 5% at this one. I’m just going to throw 5% at it.

6:27

And as a result, you end up getting in getting these like secondary variables that you’re injecting into the market, the market doesn’t care about. But you’re, you’re making a bet outside of the fact of whether or not you think it’s a good trade setup to begin with. And if you think it’s a really good trade setup, you’re putting more money on there.

6:43

If you think it’s a bad trade setup, you’re putting less money on there. Now the question is, is, well, it sounds good on the surface, right? It’s like, Oh yeah, put, put your money where you’re most confident in, put your the least amount of money in the trade setups that you’re the least confident. Well, why would you even take a trade setup that you’re not necessarily liking or you think that it’s a high risk.

7:03

Why put any capital at risk at that point only go after good really good trade setups. And so for me, standardizing the, the amount that I’m risking on every trade, whether I’m trading JPM or whether I’m trading SSO or whether I’m shorting the market or whether I’m going long on the market needs to be the same because by doing so, I’m not injecting another variable in the market.

7:26

I’m not shooting from the hip saying this is what I think that the the stock’s going to do. Because I can tell you from experience, the best trade setups that I’ve ever been a part of are often times the ones that I was like a little bit nervous. And I was like, oh, man, I hope I’m making the right decision here.

7:42

Yeah, the the charts might look really good, but I knew that there was, you know, you get these impressions about stocks you might lose three times in a row on a stock. Like it could be any stock, it could be meta, right? And META, you’ve lost the last three times you trade a meta, it’s like, oh man, this is a great trade setup, but I have no confidence in this one.

8:01

And then you end up blowing the the roof off of that one. You go up 25% on it. You’re like, man, I’m glad I didn’t, you know, listen to myself about that one. I’m glad I didn’t put less amount on it than what I would normally put. And that’s what I mean by fluid position sizes. You’re just shooting from the hip. You’re letting emotions dictate and that’s largely what will dictate whether or not you have a big position size or a small position sizes.

8:24

The emotions that you feel around that stock. Often times it has nothing to do with the chart itself has everything to do with the emotions surrounding the stock. So there’s stocks for me that I would just won’t trade. They’re on my do not do not trade list because I, I, I have a, I don’t trust the stock from a headline risk standpoint. 11 perfect example is Boeing.

8:49

BA is one of the, the craziest stocks from a headline risk standpoint. I won’t trade it. And I can only imagine if I did not have that do not trade list and that and BA was fair game for me to trade that. I would probably say I’m going to put, you know, 1% of my capital on that trade.

9:07

And then if it actually did work out, I’d be shooting myself because I’m like, why did I put more on that money? I, I was so stupid. That’s what you want to avoid because then what do you think’s going to happen the next time BA shows up into your skin? You’re going to be like, OK, I’m going to make up for that last trade where I didn’t put much down.

9:24

I’m going to go way overboard. I’m going to go 30% on this trade and I’m going to try to make some of that money back that I should have made on the last one. And then that stock gets a downgrade or something horrendous happens that causes the stock to go down. And all of a sudden you’ve just lost 10% on that trade. And, and you were, you were showing too big of a position size.

9:41

Why? Because you let the emotions come into that trading decision. You allowed to have fluid position sizes based on that feeling, based on that shoot from the hip mentality, gut feeling, whatever you want to call it. That’s what was driving it. You were letting variables be introduced into the market that shouldn’t have been there.

9:59

What should be there is you subscribing to swingtradingthestockmarket.com. You go to shareplanner.com, you can see all of my different options that I have different training courses. You can sign up for a different services. I have some really good stuff that I offer there. You can you can go there when you go to swingtradeinthe-stockmarket.com, swing trade in the-stockmarket.com that will take you to to my share planner website.

10:22

So there you can support this podcast by signing up for one of those services really good. One of them of which really cheap and affordable is the swing trade in the stock market service that provides you with all of my stock market research each and every day. That’s going to include stock market updates, updates on the mega caps, plus a daily watch list of stocks that I’m looking to trade each day, plus a master a bullish embarrassed list of stocks that I’ll curate those setups from by going to swing trade in the-stockmarket.com.

10:52

So check that out. You’re supporting the podcast in the process. One of the things too, that not have a fluid position sizes will keep you from doing. It’ll keep you from trading trading trash. There’s a lot of trash you can trade out there. A lot of people get caught up in some of these EV stocks.

11:09

There’s a lot of like stocks like Rivian and and neo and I might have lost some of you guys just by mentioning those stocks in the same sentence as trash. But it’s not so much that the companies won’t eventually make it. But when I call something like trash stocks that they can often mean like highly volatile, highly unpredictable stocks.

11:27

Maybe one day they, they come around and they do really good, But one of the things that my trading strategy won’t let me do is trade, trade those because 1. I don’t trade stocks under $10 a share. Neo is below that threshold, so I don’t have to worry about that one. Rivian is right at the threshold.

11:43

So but I I won’t trade them just because they’re, they’re so volatile. Trying to get a good stop loss can be next to impossible to do so haven’t. So for instance, if I was to trade Rivian, which is slightly above $10 a share at the moment, I would be getting into a stop loss probably if I’m just guessing here, probably like 1015%.

12:07

So then I need about a 30% return to even justify that risk that I’m taking on. But with with a with a 16% position size, you’re starting to get into some crazy risks there. Something that goes a little bit beyond now fluid position size, like, yeah, let’s throw some money at it, right?

12:23

Let’s throw, you know, maybe 3% of my capital at it. Yeah, but then you’re you’re injecting emotions, you’re injecting variables into the market that the market doesn’t care about. That doesn’t help you long term. So I keep my position sizes the same.

12:39

I don’t engage in fluid position sizes at all. And it keeps the emotions the same. Every trait is just as serious as the other one. The one thing I don’t want to do is like, it’s only a 3% position size. I’m not too worried about it. That’s always a bad thing because if you’re not taking your trades serious because they’re not big enough, then you’re not you’re you’re not managing the risk.

13:04

You’re going to likely let that stock stop loss on that trade slip. If if you’re even using a stop loss to begin with, you’re not going to be passionate about that trade in the sense that you’re going to see it through from cradle to grave. With all my trades, they’re all the same position sizes.

13:22

So I’m taking every single one of them extremely, extremely serious. I’m going to manage the profits. I’m going to manage the risk. When the trade goes against me, I’m not going to show, you know, little, little interest in the trade. Like it’s not a big deal. Now there is a time where as I’m taking profits, that position size does shrink.

13:40

And in doing so, that’s because I have taken profits along the way. That’s a good place to be in. That’s where I have a lot of profits. I’m moving up the stop loss. I’m letting that final third or final quarter of a position run as long as it can before I eventually close out the trade.

13:58

So remember like the the worst trades sometimes or the, the ones that I have the least amount of confidence and they turn into a lot of times my, my, my best trades. And if I’m putting the least amount of money in those, that’s a problem because then that would suggest too, that some of my trade setups that I’m the most confident and the ones that I am most excited about, they’re, they often times turn out to be some of the worst trades that I make.

14:21

You know, the ones are like, man, that one did not go the way I expected. That one just went straight down and took out my stop loss right away. But then if I’m using fluid stop losses, it would suggest that I’m putting the most money into the trades that I’m most excited about and the least amount of money in some of the trades that I’m I’m I’m most worried about, but they become the most successful.

14:43

And you don’t want that to take place and you’re trading, you’re projecting how successful you’re going to be on a trade without actually knowing with any confidence how successful you’re going to be on a trade. Every trade that I go into, I I talk about how someone like not not sure of at times, and not not because I think that sketchy setups, but because I might have a preconceived notion about it might be like Holy Cal, you know, I I’ve traded, you know, Apple the last three times and I’ve turned up negative each time.

15:13

That doesn’t mean that the 4th time is going to be negative. Just means the previous three times. So I might have a lower level of confidence just from an experience standpoint. But what I don’t want to do is project how successful that fourth time is going to be without actually knowing or by by by bringing down the amount that I’m investing in the trade.

15:34

I don’t want to do that, so I keep my trade size is standardized. I keep them all the same. So wrapping it up here, what have we learned? Fluid position size is not bad because you’re shooting from the hip. It’s kind of a gut feeling mentality and often times what you should be putting into it.

15:53

That trade is not the correct amount. You’re injecting a variable into the market that the market doesn’t care about. So we want to stay away from that. Think way of thinking also standard position size is not basing it off the amount of the stop loss. And I’ve done a number of podcasts on that or podcast episodes on that recently.

16:12

So go back and check some of that as well if you want to know more about my opinion on those those questions. But I don’t, I don’t base my amount or my position size based on how wide or house or tight the the stop loss is. I keep it standardized across the board.

16:29

If you enjoyed this podcast episode, I would encourage you to leave me a five star review on whatever platform that you’re listening to me on, whether it be Spotify or Apple or, or there’s tons of them out there. I don’t even know how many of them are out there now. But whatever platform you’re listening to me on, do me a a, a huge, tremendous favor.

16:45

It means the world to me. Just leave a five star review. I would greatly appreciate that also if you’re listening to me on or watching, I guess in that case on YouTube, make sure to like and subscribe. Tell me down in the comments below. What are your thoughts on this episode? How how do you approach your position sizes?

17:02

Is it standards of fluid or is it based off of the stop loss? Would love to hear your approach, your take. Maybe you got a different way of doing it, but I’ve never even heard before. So let me know about that and make sure to check out Swing Trade in the-stockmarket.com and make sure to send me your questions, ryan@shareplanner.com.

17:21

I do read them. I love hearing from you guys. Let me know what you guys are struggling with the problems that you’re having in your trading. I want to hear about them. Thank you guys and God bless. Thanks for listening to my podcast, Swing Trading the Stock Market. I’d like to encourage you to join me in the Share Pointer Trading Block where I navigate the stock market each day with traders from around the world.

17:43

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18:05

If you have any questions, please feel free to e-mail me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon. Exit