We had some recent changes to the SwingTrader product and there are some lessons to be learned as to why. No matter what your style of trading, risk management is the most important job of any trader.
Position sizes are a critical part of portfolio management. Too large and it may be hard to hold positions without risking large losses. Too small and you get watered down results that make it harder to beat the market. And if you can't beat the market, what is the purpose of your extra effort?
What Changed In Our Position Sizes?
Our position size usually starts with defining a full position. From there we can customize what portion of a full position we start with. A more volatile stock or a gap up may require something smaller than a full position to manage our risk. Full positions are easier with less volatile stocks, many ETFs or entries where our stop isn't very far away.
Our latest change reduced our full position size from 12% down to 10% of our model portfolio. At the heart of the product is a goal of not just idea-generation but also education. Using a nice round number makes the math easier for teaching.
But more important is how we might achieve the full position. Previously, we would make our decision on position size at the initial entry. Depending on where a logical stop loss was, we would adjust the position size lower when the risk was higher.
It's a sound risk management principle. But as stocks move, the risks and potential rewards can change. That's why we've added more flexibility to our protocol. Now we may add to a position when it's working. It acknowledges that the potential reward increased while the potential risk decreased.
Swing Trading Example: Spotify Stock
Take Spotify. At our initial entry (1) we were using 12% for a full position. When we added Spotify stock, it was a nice setup with tight action skirting the 21-day moving average line.
But the Nasdaq composite was down 1% that day. As a part of our risk management, the possibility of a market pullback loomed. So, we went with a half position (6%). Our expectation was to add the other half if it started working.
But Spotify gapped up for an 8% gain the next day on reports the music streaming app would raise prices (2). With that kind of cushion and the power behind the move, we waited to see if we could get more out of it. Once it looked like it was ready to digest its 10%-plus gains, we trimmed half of our position to lock in profits (3).
Here is where we are adding flexibility: As Spotify held tight at 300, we looked at the bounce from that level as a chance to add back the position (4). Spotify showed resilience relative to the market (see the strong relative strength line). With the bounce at 300 we added to the position. A quarter add seemed appropriate and with our adjusted position size that meant a 2.5% add.
Even better, we added to the position more than 1% lower than our exit. That's an improvement to the risk management. When Spotify didn't digest gains for very long and held tight, it's nice to have the flexibility to reward your best acting stocks with more money. It's also more in line with how we actually trade.
We'll be making additional changes along the way and as always a great place to keep abreast is from the SwingTrader FAQ page and through our regular score card webinars.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
