for: for:BullCharts BullChartsUser UserGroup Group and U3A (Manningham) and U3A (Manningham) Stockmarket Stockmarketgroup group

Position sizing March 2014

“The share market can seem mystical and almost like black magic; but with the right support and assistance, it just seems like magic.”

Robert Brain © Copyright 2014, Robert B. Brain, Brainy's Share Market Toolbox — www.robertbrain.com

When trading / investing in shares: 1) Should we use a fixed position size every time (ie. same dollar amount)? 2) Is there a minimum position size to use (ie. minimum dollar value)? 3) Is there a maximum position size to use? 4) What does it matter?

Revision: 1c

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Please ask questions.

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Let's discuss details.

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Price charts prepared using BullCharts software.

www.bullcharts.com.au Every chart tells a story. Understand the story in the chart.

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This presentation does not include any advice.

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For proper advice, your personal financial situation needs to be considered.

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This presentation is pure education, only for your general awareness.

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There are no recommendations to take any action, or to invest any money in any way.

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Always consult a properly licensed advisor before making investment decisions.

advice

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Let's say we have $100,000 to invest. ●

Is it a good idea to allocate only $1,000 to any one position?

What about the impact of brokerage and slippage?

© Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

Let's say we have $100,000 to invest. ●

Is it a good idea to allocate $70,000 to just one position?

Excessive risk?

© Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

Let's say we have $100,000 to invest. ●

Why not invest a round $5,000 or $10,000 in every position?

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Could we maximise our profits with the largest possible position size?

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What is the largest possible position size?

© Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

What do you think about this?

© Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

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Position sizing is very important and if applied correctly, it can dramatically improve your strategy performance and help you avoid ruin (“optimise”).

The consequences of not doing it: ●

Too much of the capital at risk.

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Losses could be higher.

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Not enough of the capital at risk.

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Potential profit could have been greater.

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Additional positions / investments might have been possible (ie. extra opportunities). © Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

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There are two key approaches to position size: (a) Fixed dollar amount per trade (ie. no position sizing). (b) Fixed Risk per trade References: ●

“Trade your way to Financial Freedom”, Van K. Tharp (1998), McGraw Hill.

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http://www.adaptrade.com/Articles/article-op.htm © Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

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Option (1)

Option (2)

Ten parcels of $10,000 each ie. Fixed Dollar Amount

Utilise the “2 Percent Rule” to optimise the position sizes.

Which do you think might be better? © Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

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Consider the two different position sizing methods

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Assume a specific entry strategy, and an exit strategy

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Look at ten stocks from the XJO index (XJO = S&P/ASX 200)

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Look for stocks that showed an uptrend

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Consider the period 2012-2014.

© Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

Entry dates, exit dates, prices, etc.: Stock Code

Entry date

Entry Price

Exit date

Exit price

Price Increase $.c

Price Increase percent

Period (weeks)

Percent annualised

TPM FLT RMD AMC HGG MQA ALL JBH SHL MGX

20/02/12 23/07/12 20/08/12 06/09/12 24/09/12 19/11/12 17/12/12 25/02/13 20/05/13 19/08/13

$1.50 $21.59 $3.55 $6.83 $1.76 $1.51 $3.07 $12.27 $14.55 $0.67

11/06/13 09/12/13 11/11/13 14/03/14 14/03/14 14/03/14 14/03/14 28/01/14 14/03/14 03/03/14

$3.32 $45.90 $5.38 $10.22 $4.38 $3.14 $5.17 $19.54 $17.39 $0.85

$1.82 $24.31 $1.83 $3.39 $2.62 $1.63 $2.10 $7.27 $2.84 $0.18

121.3% 112.6% 51.5% 49.6% 148.9% 107.9% 68.4% 59.3% 19.5% 26.1%

68 72 64 79 77 69 65 48 43 28

159% 156% 63% 76% 219% 142% 85% 55% 16% 14%

Open or Closed?

Open Open Open Open Open

© Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

(1) Fixed Dollar Amount per Trade Pos Size: Stock Shares Code qty TPM FLT RMD AMC HGG MQA ALL JBH SHL MGX

6667 463 2817 1464 5682 6623 3257 815 687 14925

$10,000.00 Pos Value

CLOSING VALUE

PROFIT Price or increase LOSS percent

$9,999.00 $9,996.17 $9,996.80 $9,999.12 $9,998.56 $9,999.22 $9,998.99 $9,987.78 $9,995.85 $9,999.75

$22,133 $21,260 $15,155 $14,963 $24,886 $20,795 $16,840 $15,925 $11,952 $12,612

$12,134 $11,264 $5,158 $4,964 $14,888 $10,795 $6,841 $5,937 $1,956 $2,612

121% 113% 52% 50% 149% 108% 68% 59% 20% 26%

$99,971

$176,522

$76,551

77%

Period (weeks)

Percent increase (pa)

68 72 64 79 77 69 65 48 43 28

159% 156% 64% 76% 219% 142% 85% 55% 16% 14%

© Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

Use these money/risk management rules: ●

Use the “2 Percent Rule” to “risk” no more than 2% of total capital (see explanation, next slide)

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Have no more than 20% of total capital allocated to any one position.

© Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

Today's Capital:

$100,000

Risk amount using the Percent Rule: 2.00% Stock Intended Initial Code Buy Price Stop (= Entry) Loss (DLY)

TPM FLT RMD AMC HGG MQA ALL JBH SHL MGX

$1.50 $21.59 $3.55 $6.83 $1.76 $1.51 $3.07 $12.27 $14.55 $0.67

$1.40 $19.95 $3.34 $6.60 $1.63 $1.40 $2.90 $11.45 $13.30 $0.63

R

x% of Capital

Shares qty

$0.10 $1.64 $0.21 $0.23 $0.13 $0.11 $0.17 $0.82 $1.25 $0.04

$2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000

20000 1219 9523 8695 15384 18181 11764 2439 1600 50000

What is the investment cost of these positions?

© Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

Today's Capital: Risk amount using the Percent Rule: 2.00% Stock Intended Initial Code Buy Price Stop (= Entry) Loss (DLY) TPM FLT RMD AMC HGG MQA ALL JBH SHL MGX

$1.50 $21.59 $3.55 $6.83 $1.76 $1.51 $3.07 $12.27 $14.55 $0.67

$1.40 $19.95 $3.34 $6.60 $1.63 $1.40 $2.90 $11.45 $13.30 $0.63

$100,000

R

x% of Capital

Shares qty

$0.10 $1.64 $0.21 $0.23 $0.13 $0.11 $0.17 $0.82 $1.25 $0.04

$2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000

20000 1219 9523 8695 15384 18181 11764 2439 1600 50000

Capital Risk (=x%): Posn Limit: Position Reduce Value Qty if > x% of capital $30,000 $26,318 $33,807 $59,387 $27,076 $27,453 $36,115 $29,927 $23,280 $33,500 $326,863

13333 926 5634 2928 11364 13245 6515 1630 1375 29851

20.00% $20,000 Reduced Position Value

CLOSING VALUE

$20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000

$44,267 $42,520 $30,310 $29,927 $49,773 $41,589 $33,681 $31,850 $23,904 $25,224

$200,000

$353,044

© Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

Buy progressively Price Price Exit Exit

Stock Code

Entry date

Entry Price

date

price

Increase $.c

Increase percent

TPM FLT RMD AMC HGG MQA ALL JBH SHL MGX

20/02/12 23/07/12 20/08/12 06/09/12 24/09/12 19/11/12 17/12/12 25/02/13 20/05/13 19/08/13

$1.50 $21.59 $3.55 $6.83 $1.76 $1.51 $3.07 $12.27 $14.55 $0.67

11/06/13 09/12/13 11/11/13 14/03/14 14/03/14 14/03/14 14/03/14 28/01/14 14/03/14 03/03/14

$3.32 $45.90 $5.38 $10.22 $4.38 $3.14 $5.17 $19.54 $17.39 $0.85

$1.82 $24.31 $1.83 $3.39 $2.62 $1.63 $2.10 $7.27 $2.84 $0.18

121.3% 112.6% 51.5% 49.6% 148.9% 107.9% 68.4% 59.3% 19.5% 26.1%

© Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

Stock Code

Intended Buy Price (= Entry)

Include this posn? Y/ N

Pos Value

TPM FLT RMD AMC HGG MQA ALL JBH SHL MGX

$1.50 $21.59 $3.55 $6.83 $1.76 $1.51 $3.07 $12.27 $14.55 $0.67

Y Y Y Y Y N N N N N

$20,000 $20,000 $20,000 $20,000 $20,000 $0 $0 $0 $0 $0 $100,000

CLOSING PROFIT VALUE or LOSS

Price Increase percent

$44,267 $42,520 $30,310 $29,927 $49,773 $0 $0 $0 $0 $0

$24,267 $22,520 $10,310 $9,927 $29,773 $0 $0 $0 $0 $0

121% 113% 52% 50% 149% 0% 0% 0% 0% 0%

$196,796

$96,796

97%

Period Percent (weeks) increase (pa)

68 72 64 79 77 69 65 48 43 28

159% 156% 63% 76% 219% 0% 0% 0% 0% 0%

© Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

Option (1)

Option (2)

Ten parcels of $10,000 each ie. Fixed Dollar Amount

Utilise the “2 Percent Rule” to optimise the position sizes.

Profit = $76,551 77% increase

Profit = $96,796 97% increase

© Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

By adjusting the position size, to “optimise” it based on key criteria, we can improve the portfolio performance. What do you think?

© Copyright 2014 Robert B. Brain — Brainy's Share Market Toolbox — www.robertbrain.com

Optimise position size

Every chart tells a story. Understand the story in the chart. 24

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