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The domestic market has lost its momentum and it is in the midst of a correction and the foreign institutional investors have been selling their holding unabated in the Indian market. In addition, they are also very picky in taking new position in any securities.
The Foreign Institutional Investor have sold for Rs 25572.19 crore in the month of October. In November, they have sold for Rs 13438.27 crore. As the market is expected to consolidate or correct further, it is important for a retail trader/investor to protect his/her capital and the profits that they have made in the recent bull run.
This is where, position sizing comes as this is a good time for a long-term investor or positional traders to accumulate as some blue-chip stocks and good fundamentally strong stocks have corrected significantly.
So, what is position sizing?
Position sizing is a technique which traders or investors use to minimise their risks and maximise their profits. It is a technique where traders calculate the number of securities that they can buy and hold within their portfolio. In other words, it is a method to determine the funds required to be allocated towards a specific security.
As a trader or investor, you must know how much of capital you are willing to risk to make profit. For this, the target price and stop loss is important. There are different ways to determine the position size. However, we will look at an easy way to calculate it and let us understand it with an example.
Assume Dixon Technologies is trading at Rs 4500 per share. You have Rs 1 lakh in your trading account. You are ready to risk 2% of the capital which comes to Rs 2000. You expect to enter the position at Rs 4520. You keep the risk to reward ratio at 1:2. This means you are ready to risk Re 1 for a reward of Rs 2. Let’s say, you keep the stop loss at 5% from your entry price.
Stop loss = Rs 4520* (1 – 5%) = Rs 4294
You expect the stock to rise by 15% from your entry price which is Rs 4520.
So, target price = Rs 4520 X 1.15 = Rs 5198
Finally, to determine the position size, you will apply the below formula to buy the shares.
Number of shares to buy = (Rs 1,00,000 * 2%) / (Rs 4520- Rs 4294) = 9 (approx.)
If you are an aggressive trader, you can play around with the risk capital which is 2% or the stop loss part which is 5% here. You can increase it and take a position. If you risk averse trader, you can decrease those amount and take a position.