How Many Shares to Buy

Van Tharp has stated that the number of shares you purchase for a given trade (what he calls Position Sizing) is responsible for 90% of the performance variation of professional traders. To figure the proper position size, there are a couple of methods I recommend, both of which are covered in Tharp's book, Trade Your Way to Financial Freedom. Both methods take into account the size of your trading portfolio.

The easiest method is based on how many positions you would like to own. For example, if you have a $100,000 portfolio and would like to own a maximum of 10 positions, simply buy $10,000 worth of any stock. This is an OK method; it's better than choosing a number at random, but the second method is preferable.

Under this method, the position size is determined by the percentage of your portfolio you'd like to risk on a particular position. This number may vary depending on whether you choose to trade the Aggressive or Conservative concept. For Aggressive setups I personally risk between 0.20-0.50% per position; for Conservative setups it's 0.50-0.80%. Whichever percentage you choose, multiply it by the size of your portfolio, then divide that number by the difference between the entry and exit price. For example, using TRN from 8/18/08, risking 0.80% on the Conservative setup in a $100,000 portfolio, I get 209 shares.

Ticker	Entry	Exit A	Exit C	Chart
TRN (Trinity)	37.31	35.34	33.49	Chart

($100K * 0.80% = $800 / [37.31 - 33.49] = 209 shares.)

A calculator is located on the right-hand side of the blog.