Position size strategy gives too large positions

I’m using a position size model that gives number of shares to buy depending on my risk and ATR(14)-multiple. #shares = amount risking / ATR-factor

I risk 1% of my capital and use 1.5 x ATR. The problem is that with low volatile stocks, this model will give me to big positions compared to my capital. Positions over 15% of capital.

Does anyone have a similar model, that uses risk percentage and ATR, but also incorporates totalt capital so that positions will be at maximum 10%?

dagjonas said:

I’m using a position size model that gives number of shares to buy depending on my risk and ATR(14)-multiple. #shares = amount risking / ATR-factor

I risk 1% of my capital and use 1.5 x ATR. The problem is that with low volatile stocks, this model will give me to big positions compared to my capital. Positions over 15% of capital.

Does anyone have a similar model, that uses risk percentage and ATR, but also incorporates totalt capital so that positions will be at maximum 10%?

Click to expand...

A lot of professional traders use volatility-based stops, so I would say you are heading in the right direction with your approach.

You might be doing something incorrectly if your position sizing model is telling you to risk 10%-15% of capital on a trade.

The factors going into your position sizing model should be the % of capital you are willing to risk (e.g. 1%) and the stop size (i.e. entry level less planned stop loss level). In determining where to set the planned stop loss level, you should consider the ATR - i.e. it sounds you want your stop to be at least 1.5 ATR's - also very reasonable.

At this point, the only thing then changing is the volume/quantity of your trade in number of shares.

If the ATR is low, then the stop loss becomes tighter, and the number of shares for your trade becomes greater - however the max planned loss should still not exceed 1% of your trading capital.

That's quite a long answer - am hoping that I read your question correctly, and hope the answer helps to some degree.

Thanks for your reply options-gorge!

I really do get positions to big with my model (2 times ATR now), again:

size in units = ((porfolio size * 0,01)/(ATR*2))

Let's say my account is 50 000, a stock at 150 per unit, with ATR 2, tells me to buy 125 shares at 150, which is 18 750. 37,50% of my portfolio size. What am I doing wrong?

dagjonas said:

Thanks for your reply options-gorge!

I really do get positions to big with my model (2 times ATR now), again:

size in units = ((porfolio size * 0,01)/(ATR*2))

Let's say my account is 50 000, a stock at 150 per unit, with ATR 2, tells me to buy 125 shares at 150, which is 18 750. 37,50% of my portfolio size. What am I doing wrong?

Click to expand...

This doesn't quite sound right. Let's go back a couple of steps.

Account = $50k
$ risk per position = 0,01 of 50k = $500
Stop size (in $/share) = ?
ATR = ?

You did not indicate the ATR level.
Let's say the ATR(14) on daily timeframe for your stock is $5. You want your stop loss to be twice the ATR, thus $10. Thus, your entry is at $150, your stop at $140. You are risking $10 per share.

$500 is what you are willing to risk for the entire position. Thus, you purchase 50 shares, as this gives you a planned position risk of $500 (50 x $10). Yes, your purchase price is $150 x 50 = $7,500 - however you are (in theory) not risking the entire $7,500 - so that figure is not taken into account.