How to Take a Trade with a Big Position Size

Just because you are maintaining a highly concentrated portfolio does not necessarily mean that you are maintaining a high-risk portfolio.

For example,

let’s say you buy a stock with a 10% position size and an 8% stop loss.

The stock goes up and hits your target of 20%.

If you make a 20% return on a 10% position size, you make 2% on your portfolio.

The next trade that you take can be taken with a big position size because now you have "earned the right to take risk".

You can risk your entire 2% portfolio gain on your next position.

On a 25% position size, if you keep an 8% stop loss, that’s a 2% portfolio risk.

If you do that and the position goes up by 50%, you end up making a 12.5% return on your portfolio.

That’s a massive return from a single stock at a portfolio level.

Is there a downside to this?

Of course, there is a downside to this.

What if you lose the entire gain that you have risked on your 25% position size?

Can it happen?

Of course, it can happen.

But the point is, you are not risking your capital here.

You are risking your pre-booked gains.

So the idea is, as a professional trader, before you even take a big position size in a stock, you have to "earn the right to take risk".

Unless you have earned the right to take risk, you should trade with a small position size.

Try violating this principle and see what happens to your portfolio.

Regards,

Rohit Musale, CFA

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