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Position sizing

December 14, 2006
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We talked about this at our last meeting, so I thought I’d show how to calculate a position size using my newest position. ININ Nice fundamental scores and the numbers in the Estimates keeping it from a higher score look OK to me. Big chart rank looks to be decreasing, but it’s too soon to call it out. The group chart looks good. Consolidating after big upward move with the rest of the market.

After positive earnings announcement, there was good buying on 9/24. Since then it’s gone sideways. Another buying volume spike on 11/14, but resistance was held.
Today saw a big breakout after volume ramping up the last two days. The consolidation also formed an ascending triangle, now confirmed in it’s break. The last thing we need to call it successful is for the price to either just charge ahead, or successfully test old resistance as new support.

So now I expect the former resistance at about 19.13 to be new support. I’ll get out on a close below that line. However, planning for some wiggle room intraday, I will set a stop loss order(stop sell) at 3% below that, 18.55. With my buy price of $20.18 and the stop sell order at $18.55, barring some catastrophe, there is about $1.63 risk in the trade.

Most teaching recommends risking about 1-2% of your whole portfolio in any given position. That doesn’t meant the amount you can put into a trade. That means that amount you’ll put at risk. So whether that’s $200 or $20,000 you take your chosen acceptable risk amount and divide it by the $1.63 at risk in the trade we’ve planned. Then you have the number of shares you should buy. In most cases, I will round down to a nice round number, particularly with optionable stocks. It’s nice to have round lots of 100 if you want to leg into a covered call.

Using the projection from the ascending triangle pattern, my target is around 23. With approximatley $1 to the support level and $3 to 24, my risk/reward is about 1/3. If and when it reaches $23, I’ll either take the profit or re-evaluate the potential of “letting the winner run.”

This is not a trade recommendation. I am indeed a bit nervous that it has already moved 6.25% today and over 15% in three days. It’s just an example of position sizing and considering whether the risk is worth it. I welcome any thoughts on the trade, however.

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