Use Two Yardsticks for Position Size

I receive a lot of emails about position size. How big should a single position be? There is no single correct answer to this question. Position size depends purely on your trading methodology and your discipline.

Position size relative to the value of your entire portfolio is a matter of style and comfort. Some traders can effectively manage a very large number of positions, each name comprising no more than 1% or 2% of the portfolio size. The key to this approach is ensuring that such extreme diversification is not guaranteeing mediocre performance. After all, can you really control risk with 50 or more positions?

Some folks have no problem with this full-time approach. They watch their positions carefully and set hard stops that mitigate losses. If they are aggressive traders, they'll typically be in the high-beta stocks when the market is rushing higher, and they'll be scaling out of these when the market weakens. They also tend to hedge their large portfolios with positions that benefit from a market decline to lessen the damage. ...