Choosing position sizes is one of the most important parts of trading. It seems basic, and in some ways it is. The key is making sure you are choosing position sizes strategically. By simply changing the way I thought about position sizes, I have increased the amount of trading opportunities I have.
Everyone has a different approach to position sizing.
Some people trade the same size for every trade to remain consistent (ie: always trading 1000 shares). Some trade based on a dollar amount (ie: putting $5000 into each trade). Others choose position sizes based on their account size (ie: putting 10% of your capital into a play). I’ve used all of those strategies before, but now I choose position sizes based on my potential risk (ie: risking a maximum amount of money per trade).
This is not revolutionary idea, but it has positively effected my approach to trading.
(Maximum $ Risk)/(Current Stock Price – Stop Out Price) = Position Size.
Maximum $ Risk being the most amount of money you are willing to lose. (Not a percentage risk. This is important)
Stop out price being the spot you get out of the trade.
So, for example, if a stock is $10, support is at $9.75, and you want to risk a maximum of $200, the formula looks like this:
($200)/($10-$9.75) = 800 shares
Here is a calculator for speeding up the process:
Knowing your risk is one thing, planning for that risk is another.
Basing a position size around potential risk psychologically prepares you for a trade. If I base my position size around a maximum risk of $200, I am prepared to lose that. There’s no reason for concern – either the trade plan works, or I lose the amount of money I was prepared to lose. For me, this takes some of the “unknown” out of a trade plan.
This strategy allows you to take a more robotic approach to trading. Your trade idea is either right or wrong: simple as that. You are planning your risk in advance so you are prepared for both outcomes. There’s no room for rationalization here. As Michele from Trade on the Fly would say, you’re either “right or right out.” This leads to the importance of your stop out price (aka your risk level).
Your stop out price should NOT be arbitrary. It should be the price where your trade idea was proven wrong. For example, if you go long on a stock because it is setting higher lows, your trade idea is proven wrong when a lower low is set. Therefore, your stop out price should be at/before a lower low.
Here is a quick example from a trade I placed today. I entered the stock around $5.95 looking to swing the stock for a break of the ascending triangle pattern at $6.05. Later during the day, I exited the stock at around $5.88 for a small loss. That may seem odd when there is clearly support at $5.80, but I was respecting my plan. I sized in basing my risk at the level where my trade idea was wrong. My trade idea was that the stock would break the top resistance line of the ascending triangle. Instead, it broke the bottom trend line, meaning my hypothesis was wrong. Why would you stay in a trade after you were proven wrong? Sure, the stock may end up moving higher, but that doesn’t matter. You can’t take a robotic approach to trading if you constantly think “What if?”
The goal should be to simplify trading to 2 potential outcomes per trade:
This approach allows you to understand and control all possible outcomes of a trade, without requiring you to make difficult trading decisions.
This is a big reason why I utilize this strategy. In the past, I would see $80+ stocks and stay away from them because I couldn’t take large positions. This kept me from trading some great setups for essentially no reason.
Let’s say I’m prepared to lose $200 on a trade that I believe has a 1:3 risk/reward ratio. The only thing that matters is my position size (assuming you have the capital to pay for higher priced stocks).
Here are a few examples of how this pans out across different stock prices.
|Sub-Penny Stock||Cheap Stock||Expensive Stock|
Position Size: 400,000 shares
Position Size: 400 shares
Position Size: 67 shares
Another cool thing about this approach is that percentage gains do not matter. You can take advantage of different sized moves.
|Scalp||Smaller $ Move
||Bigger $ Move|
Position Size: 6,667 shares
Position Size: 667 shares
Position Size: 67 shares
Having a set risk limit helps you trade more consistently. You are creating a comfort zone to trade within. You are also creating a trading rule to follow.
If my max risk is $200, I will never be overwhelmed by a trade (as long as I have not lost more than $200) because I am trading within my limits. Over time, this becomes like clockwork, and as long as you respect your rules, you will be operating within your comfort zone. This allows you to take some of the emotions out of trading.
There are a few important things to keep in mind when choosing a set risk.
Position sizing seems like a no-brainer, and if you have a system that works well for you, by all means, keep using it. Choosing my position sizes based off of risk assessment provides me with more opportunities and the clarity I need to trade them properly. Of course, this strategy’s success is contingent on setting a realistic risk level and obeying your stop out.
The point of this entire series of posts is to find stocks that are “in play.” We’ve defined stocks that are “in play” as ones that have a large audience. What better way to find stocks with a large audience than using social tools to see what everyone is watching/trading?
One great tool for finding good penny stocks is InvestorsHub. A lot of people have mixed feelings about InvestorsHub, but that is irrelevant to this strategy. I’m not telling you to go read all of the posts and drink the Kool-Aid. We are using InvestorsHub as a tool and nothing more.
These boards are great for finding stocks with large audiences. iHub has a huge following, so the top stock boards are good for finding some hot stocks.
Let me be clear: you are not going here to start reading posts about why a company is going to the moon! You are here to see what stocks may be in play at the moment. Look up the charts and potential catalysts for these stocks and make decisions accordingly.
Breakout boards are stock boards that have increased posting activity. All this means is that the board has more posts than it usually does. So, if the “Rate” column says 800%, the board has 8 times more posts than usual.
This can sometimes be helpful for finding big moves before they happen. People will often discuss important upcoming catalysts that may cause the board to have increased activity. You will have to wade your way through a lot of junk, but that is part of the idea generation process.
The iHub ticker buzz cloud keeps track of increased social activity regarding a stock. The tickers on this page are the most mentioned tickers. The bigger the font, the higher the social buzz. Additionally, the color of the ticker allows you to understand whether the stock is up, down, or even.
For those of you who don’t know, Investors Hub has a feature where you can create a list of your stocks. Unsurprisingly, it is called “My Stocks.”
This page lets you see which stocks people are adding to their “My Stocks” lists most frequently. As you can see, a few of the top names were all in play this week.
Additionally, this page lists the most popular stocks on people’s “My Stocks” lists of all time. This is another handy tool. You can find stocks that have very loyal followings locking up the float. Additionally, you can keep these stocks on watch. If they move, they may move big because they have a large audience.
This tool has nothing to do with iHub at all. Instead we will be using Twitter. Twitter is an extremely helpful tool to use when trading. You can see other people’s opinions on the stocks you are trading and you can also get new ideas. The key is following the right people. Follow people who have similar strategies as you do. Reading a tweet about an AAPL breakout will do me no good because there is a rare chance I will trade it. However, this same tweet may help someone else.
The second most important part of this is installing a program called TweetDeck. This program gives you an alert every time someone you follow posts something. This alert makes a sound, and brings up a small alert window in the top of your screen, allowing you to read the alert without stopping what you are doing.
This is a good form of extra idea generation when you are busy looking at other stocks. Essentially, you have an entire group looking to find good plays and share them. Just remember, this will only be beneficial if you follow the right people. Beware of pumpers, and avoid clouding your screen with tweets that don’t help.
The last tool I want to discuss is chat rooms and stock services. This can be one of the most helpful tools out there. When you join a chat, you are trading with a team. You can’t possibly find all of the hot stocks in one day, but when you work with a group, you can accomplish a lot more. You can trade by yourself, or you can trade alongside plenty of great traders.
These traders can alert you to moves you may have otherwise missed. They can also add a new perspective to your trading strategy. For example, you may see a chart that you think has a perfect long setup, but if you run it by another trader, they may be able to spot something you missed.
Most of these services will also provide watch lists, which gives you even more stocks to trade. I don’t trade off of other people’s watch lists very often, but I will incorporate them into my strategy for finding stocks every now and then.
Keep in mind that there are a lot of scams and sub-par services out there, and you need to be careful with how you spend your money. I’ve tried plenty of services because I like seeing how other people trade. The only service I can recommend without a second thought is InvestorsLive (which I reviewed here). Nate Michaud is an amazing trader and there are plenty of other great traders in the chat room as well (too many to name off). Additionally, there is a chat room just for OTC stocks, run by @MountainTrades, who is hands down the best OTC trader I know.
It’s important to remember that this strategy should only be used for idea generation. The keyword being “generation.” Do not simply use social tools to copy other people’s trades. Take the information and use it to help you execute your strategy.
By this point, you should have plenty of ways to find stocks to trade. That being said, finding stocks to trade is just the start. You need to have a solid strategy that allows you to profit from trading these stocks. Feel free to read through the other posts on my site to learn more about some of my strategies, and good luck!
So far, we’ve gone over how to find stocks with news and how to find stocks with EquityFeed. Both of those strategies are intended to be used more for penny stocks. I use this next strategy mostly for NASDAQ’s, however, it can be used for a variety of different stocks.
If you don’t have a stock scanning tool by now, you need one. Stock scanning tools add a whole new dimension to your trading. They let you find the hottest stocks and filter out the junk. I’m sure there are a lot of great scanners out there. I use 2 main ones, and I will discuss them both.
FinViz is a completely free stock scanner, so you have no reason not to use it. They have a wide variety of ways you can filter stocks, from fundamental statistics to technical indicators. Don’t let the “free” part deter you – this is a top-notch service. I will mostly use this tool after hours when I don’t feel like using my multi-monitor setup for other scanners.
Mess around with different scans and see what works for you. I don’t have many saved scans for this tool. I like to try different things. The goal is to create filters that align with your strategy. Experiment with different inputs until you get the right outputs.
My favorite part about this tool is that it displays a lot of charts all at once. This makes it easy to go through hundreds of charts and quickly spot the ones you like. Additionally, their technical charts include some trend lines and patterns that may help you spot nice charts faster.
E*TRADE Pro Strategy Scanner is my main scanning tool. I use it during market hours and after hours as well. This tool is crucial to the success of my day trading strategies.
I believe that E*TRADE Pro charges $99, however, if you make at least 30 trades/quarter, the software is free.
The strategy scanner module allows you to set criteria for stocks you want to find. You can run real-time scans or scans from previous days.
I have four main scanners setup during trading hours.
This scanner is the most active. It is intended to find hot stocks for scalp trades or breakout plays. A lot of the alerts are useless, but I have a good feel for which ones are the best, and I am constantly refining the scanner’s criteria.
I filter stocks by price, # of trades, dollar volume, and total share volume.
I receive alerts for stocks setting new highs, breaking above or below 20/50/200 day moving averages, forming symmetrical triangles, breaking out of consolidation ranges, forming bullish candlestick patterns, and more.
During the day, I keep an eye on a stock’s relative volume and the number of alerts it has had in order to better assess the quality of the alert quickly.
This scanner tracks increased StockTwits activity for stocks. Remember, stocks are considered “in play” when they have a large audience and high volume. This increased social activity indicates that there is a large audience. You’ll also notice that there is high relative volume for most of these alerts. This scanner is nice because it only delivers a few alerts each day, so I’ll just glance at it a few times each day.
I only filter these stocks by price (under $10)
The only alert is increased StockTwits activity.
This is another scanner that only delivers a few alerts each day. I use it to find good penny stocks for swing trades.
I filter stocks by price, dollar volume, and share volume.
I receive alerts for stocks setting new highs or lows, or breaking above the 50 or 200 day moving averages.
I have hundreds of symbols on different watch lists, but I like to keep my main watch list small in order to stay focused. That being said, I don’t want to miss a move on a stock I am familiar with. So, I set up a scanner that scans all of my watchlists and alerts important activity.
I filter stocks by their dollar volume only.
I receive alerts for high relative volume, new highs/lows, and 20/50/200 day moving average crosses.
Scanners are a crucial tool for active traders. They allow you to be aware of what is going on in the market at all times. Additionally, they allow you to find stocks that are moving before other traders do. The point of showing my scans was just to give an idea of what you can do with these tools. When you create scans, they should align with your trading strategy. Otherwise, you will get a bunch of alerts that you can’t act on and the scanner is useless. Creating a good scanner takes time. I refine my scans on a regular basis. The more you use the scanner, the better you understand it. This allows you to filter out bad alerts and better refine your scanner inputs.
If you have any questions, feel free to contact me through the contact page on my site.
Check back tomorrow for the final post in this series, How to Find Stocks Using Social Tools.
In my last post, I discussed how to find stocks using press releases. If you are trading every day, you can’t rely solely on good press releases. You need other options. The main tool that I use for finding good OTC penny/subpenny stocks is EquityFeed. The tool has a monthly cost, but there is a free trial available for you to test out the software. Let me make it clear that I am not trying to force this software on anyone. I am bringing it up because it is a valuable tool in my arsenal of trading software. You can probably apply some of these strategies without EquityFeed if you would prefer not to buy the software, however, I do recommend checking it out.
Let’s get right to it. Here’s are the many ways I find stocks with EquityFeed:
Equity Feed has a streaming news module. This module constantly refreshes and alerts you whenever there is press releases or SEC filings for OTC companies during the trading day. This allows you to react to these catalysts much faster than traders who are using slower sources for news. It also allows you to view important data such as the stock’s volume, price changes, etc. You can filter the news by keywords, types of stocks, and other criteria.
Another one of my favorite features of EquityFeed is the Market View feature. This shows you all of the OTC stocks and allows you to sort them by different criteria. I split this feed into stock that are under $0.10 and stocks that are between $0.10-$0.50. Then, I sort the stocks by their dollar volume for the day or the # of trades. This allows you to see what the hottest stocks are during the day and make trading decisions accordingly. It also helps you find stocks that may be hot the next day as they continue their trends. Of course, you can filter these lists down even further, but I like to keep it simple.
This window gives you live trading alerts throughout the day and organizes them by type (each color is a different type of alert). You can create alerts for new highs, new lows, unusual volume, and block trades. This assures that you are always aware of what is going on in the market. When people bring up stocks breaking out in chat rooms or on Twitter, I have already been alerted in EquityFeed much earlier. Setting up alerts is very easy to do, unlike some other scanning tools.
EquityFeed has a feature called Filter Builder that allows you to scan the markets for stocks with very specific criteria. For example, you could create a filter for stocks with increased volume approaching their 200 day moving average. You can use this tool for live streaming during the day, however, I rarely do because I already have the trading alerts window. I will use this tool at night to find stocks that may be good swing trades or day trades for the next day. There are so many different filter variations you can make it so you need to constantly test new strategies.
EquityFeed is a great tool for people who trade a lot of OTC stocks. I recommend messing around with it a bit and seeing if it aligns with your needs. They have a 30-day free trial, and you can also get 10% off of your subscription when you use this link. If you have any questions, you can feel free to contact me through the contact page on my site.
Check back tomorrow for Part 3 of this series where I will discuss Stock Scanners.
Before you can enter a trade on any given day, you need to have a list of stocks ready to trade. If you are an active trader, your watch list should be dynamic and reactive to the markets. Having the right stocks in your watch list can make or break your success on any given trading day.
Over the next few days, I will be posting a few articles detailing ways to find stocks to trade. Let’s start with the basics.
When building a watch list, you want to find stocks that are “in play” or “hot stocks.” If a stock is not in play, you really have no reason to be trading it. So, what exactly does it mean when a stock is “in play”? It means that there is some excitement/hype surrounding the stock. People are watching the stock closely and waiting to make a move. This means the stock has a large audience who may support the move when the time comes.
The first way to find a stock that is “in play” is through news sources. When a company releases news, it means something has changed within the business. Consequently, something should change with the stock price. The news is a catalyst. If it is good news, the stock should go up. If it is bad news, the stock should go down.
Most of the news I read is for penny stocks, because these are the stocks that can move 20%, 40%, 50%+ on a single press release. I don’t read much news for bigger companies during trading hours because there are far too many of them, and if it is significant news, I will find the stock when it shows up on my scanners. Below are some places you can find news for penny stocks.:
OTC News (through the OTC Markets newswire) – News directly released through the OTC Markets website
OTC News (through third party wires) – OTC news from third parties.
InvestorsHub News – News released through iHub. The better option for iHub news is to setup news alerts for companies you follow. You will get an email whenever these companies release news. The emails will often send before the news even shows up on the iHub site.
Marijuana Stocks News – This sector isn’t as hot anymore, but I used to check this news a lot. It’s worth a look every now and then.
EquityFeed – This is by far my favorite news source. Unlike other news sources, EquityFeed picks up on almost every news piece in real-time. There is a monthly cost, but a free trial is available if you want to test it out. I will be doing an entire post on how to find stocks through EquityFeed.
There are hundreds of press releases distributed every single day. This doesn’t mean that all of them are important. It’s very easy to send out a press release. I could send one out tomorrow if I wanted to. Learning to filter through press releases is a crucial skill for traders who incorporate news into their strategy. Considering that most of the news I read is related to penny/sub-penny stocks, I have to filter out a lot of junk.
You should be asking yourself two questions every time you see a press release:
1. How will this news effect the company?
2. How do I believe people will react to this news?
Both questions are equally important. For example, a company may release news that they sold 1000 cases of their product to a recognized brand like Circle K. You do your research and learn that this company’s profit margin is terrible and this sale will likely be a one-time transaction. You just answered the first question. Now, proceeding to the second one. How do you think people will react when they find out a small penny stock company landed a deal with a brand like Circle K? Less diligent investors may get excited and purchase shares. You can usually determine the reaction to news based on price action and volume. Just make sure to ask and answer both questions.
Let’s break news down even further now. We have a few categories of news that I think are important enough to discuss.
Good vs. Bad – This one is simple. Is the news good or bad? A company may report a toxic financing deal or bad earnings. This is bad news and you can expect the stock to go down. Contrarily, a company may report an impressive new contract or good earnings. This is good news, and you can expect the stock to go up. It’s as simple as that.
“Fluff” vs. Important News – Not all news is really “news.” Some companies just release news to keep people focused on their stock, or simply because they don’t know any better. By asking the question “How will this news effect the company?” you can filter fluff news from important news.
Expected vs. Unexpected News – You’ve probably heard the expression “buy the rumor, sell the news.” A lot of people buy a stock in anticipation of expected news. This means that the news has already been factored into a stock price. In these cases, a stock may go down on good news as traders collect their profits.
Understanding how news will affect a stock price is not a science. You are not dealing with just the news; you are dealing with the mass reaction to the news. It still baffles me when I see certain press releases that move a stock’s price. You won’t be able to catch every move – focus on the best ones. Additionally, I will rarely trade solely based off of news and don’t recommend it. News is just a catalyst that brings attention to a stock. Once you find news that catches your eye, you should still apply your regular trading strategy to the trade (technical analysis, fundamental analysis, etc.)
Be on the look out for Part 2 of this series tomorrow: How to Find Stocks with Equity Feed.