Position Sizing - Never Blow Up Your Account
The #1 Reason Investors Go Broke
Risking too much money on one trade
The Formula
Shares = (Account Risk) ÷ (Entry Price - Stop Price)
$10,000 account → Risk $100 max (1%) AAPL $150 → Stop $142 → Risk $8/share Shares = 100 ÷ 8 = 12 shares ($1,800 position)
| Your Account | Risk 1% | AAPL $150/Stop $142 | Position Size |
|---|---|---|---|
| $5,000 | $50 | $8 risk/share | 6 shares ($900) |
| $10,000 | $100 | $8 risk/share | 12 shares ($1,800) |
| $50,000 | $500 | $8 risk/share | 62 shares ($9,300) |
Result: Even if ALL 10 trades lose → You still have 90% of money
Dollar Cost Averaging - A Consistent Approach
Effective Against Emotional Decision-Making
Buy same amount every month → Get more shares when cheap
| Month | SPY Price | You Invest | Shares Bought |
|---|---|---|---|
| Jan | $450 | $200 | 0.44 shares |
| Feb | $420 | $200 | 0.48 shares |
| Mar | $380 | $200 | 0.53 shares |
| Total | - | $600 | 1.45 shares |
Average price paid: $413/share (vs trying to time at $450)
10-Year Growth
$200/month → $32,000 invested → $52,000 total (12% avg return)
- Pick index fund (SPY, VOO, QQQ)
- Set auto $100-500/month
- Forget for 10+ years
Reading Stock Charts - Three Simple Patterns
Support and Resistance (Most Important)
Support: Price bounces up 3+ times = GOOD BUY ZONE
Resistance: Price rejected 3+ times = Sell or wait
AAPL Daily Chart Example:
$160 ┼─────────── Resistance (sell here)
│ ▲ bounce
$155 ┼───▲──┼─── Support (buy here)
│ ▲ │
$150 ┼─────────────
3 Easy Patterns:
- Flag: Short pause after big move → continuation
- Double Bottom: W shape → buy signal
- 50-day moving avg: Price above = uptrend
Rule: Buy at support + stop-loss just below = Perfect setup
The 5% Rule - Never Put All Eggs in One Basket
Concentration Risk in Practice
Enron 2000: 1 stock = 100% → Lost everything
GameStop 2021: 50% portfolio → Some won big, most lost
| Approach | Stock A | Stock B | Stock C | Risk |
|---|---|---|---|---|
| WRONG | 50% | 30% | 20% | One crash = 50% gone |
| RIGHT | 5% | 5% | 5% | One crash = 5% gone |
Perfect Portfolio (20 stocks × 5% = 100%):
30% Index ETF (VOO) + 70% Individual picks
Rule: No stock >5% → Sleep easy
Your Four-Step Framework
- Size positions → Never risk >1%
- Dollar cost average → $100-500/month
- Buy at support → Use charts
- Limit 5% per stock → Stay diversified
Follow these → Beat 90% of investors