Frequently Asked Questions
Market Lab Report
Please provide guidance on position sizing when buying individual stocks as well as on total portfolio exposure.
A: Position sizing is entirely up to one's personal risk tolerance levels. It is a path each investor must take to figure out their optimal levels. One useful practice is to always know your exit points in your stocks at any given time. That way, should markets tumble and you're fine with all of your stops being hit, then you can sleep well at night. Further, markets usually give some warning ahead of any major crash, so you might tighten your stops accordingly should markets give such warnings.
Our new VOSI VooDoo Report focuses on stocks presenting low risk entry points so if your risk is minimal, say 2%, from your expected buy point, you might position size twice your normal size. Likewise, if you're more conservative but wish to try your hand at a stock where you could lose 5-6% from your entry price, you might position size smaller than normal.
If you choose to pyramid a position, make sure you have adequate profit in the stock before adding to your position. Also ask yourself if, after pyramiding, you would be okay if the stock hit your maximum sell stop. For those who use the 7-week rule, some stocks can be held for a number of weeks or longer and successfully pyramided, though such stocks are more unusual in this current environment.
Total portfolio exposure is also an important factor. If you feel your total portfolio exposure is at a maximum given the overall tone of your stocks and general market, you might reduce or sell your weakest position if a new, potentially stronger stock offers an entry point.
In practice, during strong markets, the likes of which we have not truly seen in many years, I would buy 25% positions in each stock, then quickly find myself on full margin. If another stock offered an entry point, I'd reduce my two weakest holdings by half to make 25% buying power room for the new stock. This is how I typically came to hold between 12-16 positions during a market rally which could last for a number of weeks or longer.
But the challenging markets of the past few years have not just been profitable but also rewarding in terms of helping us further tighten our risk management practices. This has led to lower risk buy points such as the volume dry-ups and Wyckoff undercut & rally chart formations.
And of course, taking profits when a stock's price gets ahead of itself in context with its overall chart has made a nice difference to our bottom line.
Published: Apr 6 2017