How large or how small should your position be in any given trade? Just before I get into the answer to that, there is one prerequisite that supersedes everything, the liquidity of what you are looking to trade. You need to keep your position size to as small of a percentage as the average daily money volume. You can estimate the average money volume by taking the price and multiplying it by the average quantity of shares exchanged daily. If a stock that is trading at $1 averages in between 100, 500 and 300, 000 stocks, the average money quantity is probably in the ballpark of $200, 500. How much of the average money volume do you want to be? The less the better, but there is not any official threshold to stay under. I would say staying under 2% is pretty safe, but if you act like you really know what you're doing you can push that relatively. There have been a lot of trades where I have gone well over 2%, but in those cases if I didn't get buying momentum to sell into, I paid the price.
As long as you possess the pennis liquidity issue covered, here is how I determine my position size. To start with, I need to know a few things to figure out what my position size should be. Those are; How much I'm willing to reduce on this trade, where my entry is, and where my stop loss is at. For example , say I am watching a stock that is an uptrend, but is actually currently falling to support at $1. Because the lengthier term trend is up, I'm looking to buy into the support at $1, but if that support fails to keep, I'm going to bail. The most I want to risk losing on the trade is $200. That doesn't mean my position size will be $200 worth of gives, that means that should my stoploss get induced I want to00 lose $200. So my entry is at $1, and my stop loss will be enough below that to allow for normal market changes, we'll say at bucks. 95. Right now I know all the factors to determine my position size. My maximum risk is going to be $200, the entry reaches $1, and the stop loss is at $. 95. Based on that, my position size would be 4000 shares. 4000 shares increased by $1 is $4000, and 5% of that (which is actually my stop loss is set at) is $200. An easy way to work this out is by dividing your maximum risk amount by the percentage of the stop loss. In this case, it would be $200/ 5%, which would give the $4, 000 figure. You then simply need to factor how many gives you can aquire with that amount.
If you always risked the same amount on every trade and retained an arbitrary percentage for your stop losses, your position size would always be the same (in dollars). My problem with this is that an arbitrary percentage doesn't make sense to me since all stocks and chart are different. The stock and the chart should dictate your stop reduction. A 5% stop may work great on a single stock, but on another much more volatile one it might get triggered way too easily. If you feel that on a certain trade you desire a 10% - 20% stop damage because of either the volatility, where the best, most relevant support/resistance is at, or both, then use that wider stop, but modify your position size accordingly. That way, you're still allowing the proper amount of buffer room for price fluctuations, but you're still risking the same amount if your stop gets struck.