Contents:
- Our Trading Context
- Position Sizing Strategy
- Example Application of Small Position Sizes
- Key Takeaways
- Final Thought
In active trading, managing position sizes is a critical element in controlling risk and navigating volatile market conditions. During our recent trades of URC, we refined our approach to position sizing, particularly focusing on tactical entries and core positions. Here's a breakdown of our recommendation for small position sizes, tailored to traders managing a 1,500-share position of URC.
URC 5-Minute Chart (January 14, 2025): Key levels for stop-loss adjustments, tactical entries, and partial profit-taking as part of refining our trading strategy.
Our Trading Context
At Micro Stock Trader, we currently hold 1,500 shares of URC, divided into two categories:
- Long-term position: 900 shares set aside for long-term investment, held regardless of short-term market fluctuations.
- Trading position: 600 shares allocated for short-term trading activities, where we actively engage in buying and selling based on our Modified 10-Step Trading Plan.
This approach allows us to balance long-term growth with short-term opportunities, ensuring we preserve capital while staying agile in the market.
Position Sizing Strategy
Given that 600 shares are available for trading, we split them into smaller chunks to better manage risk and maximize flexibility. This ensures that we don’t overexpose ourselves to market volatility, especially during uncertain periods.
Core Positions
- Size: 50% of trading shares (~300 shares)
- Purpose:
Core positions are for medium-term trades where we have high conviction in the setup, such as a potential breakout or a confirmed reversal from a major support level. - When to Use:
Enter a core position near key technical levels where we expect a significant move. For example, if the price rebounds from a major support zone or breaks above a resistance level with strong volume, we commit to a larger core position.
Tactical Entries
- Size: 10% of trading shares (~60 shares)
- Purpose:
Tactical entries are smaller, speculative positions used when testing potential reversals or during volatile periods. They allow us to stay engaged in the market while minimizing risk. - When to Use:
Use tactical entries when the market is uncertain, such as near critical support or after multiple gap-downs, where a rebound may occur but hasn’t been confirmed.
Clarification: Managing an Existing Inventory of 600 Shares
Since we said that the 600 shares for trading are already owned and part of our portfolio, entering at a specific level like Php 70.50 becomes more about tactical position management rather than initiating new buys. Here’s how to handle this scenario:
Tactical Re-entry After Partial Selling
If the price approaches Php 70.50 during a downtrend, we shall consider selling a portion of our position ahead of that level (e.g., near Php 71.50 or Php 69.80) and re-entering at Php 70.50 if there’s a clear bounce or reversal. This approach allows us to reduce exposure during the downtrend and re-enter at a lower average cost.Position Monitoring Without Additional Buying
If we decide to hold the full 600 shares, we shall treat Php 70.50 as a key monitoring level. If the price holds above this level, we maintain our position. If it breaks below Php 70.50, we adjust our stop-loss towards Php 67.75 to limit further downside risk.
Example Application of Small Position Sizes
Let’s illustrate how we would apply this strategy during a typical trading session:
Day 1:
URC’s price approaches a key support level near Php 70.50. Since we already own the 600 shares, we monitor this level closely. If the price holds, we maintain our position. On the other hand, if we haven't yet completed our 600-share allocation for URC, and the price approaches the key support level near Php 70.50, we can start with a tactical entry of 60 shares to test the market and stay engaged without significant risk. This approach involves actively trading around our core inventory by reducing our exposure during the downtrend and increasing it again once signs of a recovery emerge.
Day 2:
The price begins to stabilize and move upward. If we haven't yet completed our 600-share allocation for URC, we add a core position of 300 shares, increasing our exposure as the setup becomes more favorable. Otherwise, we treat Php 70.50 as a key monitoring level. If the price holds above this level, we maintain our position. However, if the price breaks below Php 70.50, we are prepared to implement our stop-loss strategy at Php 67.75 to limit potential losses.
Day 3:
If the price approaches our profit target (e.g., Php 73.50), we can either take partial profits or sell the entire core position while holding a small tactical position in case the uptrend continues.
Key Takeaways
Avoid Overexposure
By starting with smaller tactical entries, we limit risk during uncertain conditions. Only after the setup improves do we scale up with a larger core position.Scale In Gradually
Instead of committing our entire trading position at once, we use a phased approach. Tactical entries allow us to manage uncertainty, and core positions help us capture larger moves once the trend is clearer.Preserve Long-Term Holdings
Our 900-share long-term position remains untouched, ensuring that our short-term trading activities do not interfere with our broader investment goals.
Final Thought
Managing position sizes effectively is crucial for trading success, especially in a volatile market. By combining smaller tactical entries with larger core positions, we reduce risk, remain flexible, and position ourselves for potential gains without jeopardizing our portfolio.
Would you like to learn more about how we manage risk and position sizing as we refine our trading strategy? Stay tuned for more updates as we continue documenting our journey with the Modified 10-Step Trading Plan!
Disclaimer: This post is for informational purposes only and should not be considered financial advice. Always do your own research before making any trading decisions.
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