Determining Size for Trades

Well, as I see some of the small caps melt in AH (due to bad earnings), I want to discuss portfolio allocation, mainly position sizing. I believe one position should account for no more than 10% of a portfolio. So, if you have $20,000 to invest, no position should exceed $2,000. Now, in certain circumstances, I believe that rule should slide. The main scenario is if a person's trading account is less than $5,000. If you have say $2,000; I recommend 2-4 stocks. You could do 2 large or mid caps or 1/2 mid/large caps and 2 small caps. If you have say $5,000, I would do 4-5 stocks.

The main point is to identifity the market cap size of your positions in your portfolio. In my view, you need atleast 20-40% of your portfolio with names that have $1B+ in market cap. For example, a big Top 2 position of mine is DELL. It's a large cap that is over $1B and carries less risk than say a small cap. Small caps, like GKK, CPE, FEED, etc. are microcaps and have extreme risk. Therefore, I normally buy some size in them, like 200-500 shares because I know they run hard BUT I also know they can fall hard, so I want to be careful (hence why I normally don't buy more than 500 shares of one).

Another factor I look at is Short Interest. If a firm is heavily shorted, it's probably for a good reason. Shorts do their homework. Therefore, I would want to study the stock hard, to understand their story before making a investment decision. However, in some cases where I see a turn in market internals, I will buy heavily shorted stocks for a "trade" not an "investment" in order to make a quick dollar on a short squeeze.

Summing up things, the small cap rally has been a blast. I think there have been 6 doubles, 1 or 2 triples and even a quadruple with some names but in a more serious matter, they carry more risk. You can't go broke by taking a profit, so keep that in mind and trade accordingly. I look to give back some serious gains (will still have profits but smaller) in some of the names because I just played it too risky, as the stocks reported earnings. I made a mistake and learning from this, I know next time that I will either: 1) sell half of all positions that report that day or 2) take 2 of the positions totally off the table and let the other 2 roll.


Bottom line: Small caps are fun because they offer great returns. However, they also carry alot of risk and there is no need to gamble and go all in on them.