How Many Trading Positions Should You Have At One Time?

This is a question that will inevitably be faced by every trader in their trading career. When you just get started, it seems like the entire market is a place for you to make money. Every stock seems to exhibit some pattern that you just learned and therefore you force yourself to trade almost everything that looks like some of the patterns that you learned.

The amount of positions that you may have at one time really depends on whether you are a day trader, swing trader or longer term trader. It also depends on whether you can realistically monitor all your stocks at the same time. For example, it will be almost impossible to day trade 10 stocks at the same time. You could be trading more than 10 stocks in a day but you will most probably close out your positions before initiating new ones.

Warren Buffett has more than 40 positions at one time

If you go to CNBC's Berkshire Hathaway Portfolio Tracker, you will realize that Warren Buffet holds positions in more than 40 stocks at one time. I believe that because he is a long term investor in these stocks, he has all the time he needs to monitor these stocks. When he buys these stocks, he typically holds on to them for years. So, even if he takes one day at a time to monitor the progress of each stock, he would be able to keep track of his stocks more than 5 times a year.

If I follow what Warren Buffett does and hold 40 positions at one time, it just wouldn't fit me. Having to monitor 40 trading positions at one time will drive me nuts. But I guess if you plan to hold on to these stocks for years, any bump and drop would just a small blip in your overall plan.

The amount of positions you have at one time will depend on your strategy

I believe the best way to know how many positions you should hold at one time is to examine your own trading strategy or investing strategy.

If you are an investor like Warren Buffett, by all means hold 50 stocks at a time.
If you day trade the 5 min charts, you might want to have only 2-3 positions at a time
If you use the 60 min charts, you might want to have only 5-10 positions at one time

I am primarily a trader that follow the trends on the 60 min chart. Meaning I find myself more comfortable trading continuation patterns in the 60 min charts. The positions that I hold can last from 2 days to 10 days. Some positions hit my target in 2-3 days. While others hit my target but they look like they can continue further, so I hold them a bit longer. I figure out that the ideal position that I should have will be 5-10 at one time. I notice that when I initiate a maximum of 2 new positions a day and selling them as the days go by, at any given time my trading positions will be about 5-10 at any point.

The amount of new positions you take will depend on your strategy

When we talk about the amount of new positions, we are not talking about the positions you have at any given time. It means how many NEW trading positions do you take in a single day or week or month?

My preferred strategy at the moment is to trade the 60 min Darvas box setups. They occur often enough in a single week. The primary chart that i use to find trading setups is the 60 min chart. In any week there are 5-10 very good setups. If you are using a trading strategy that occurs in the daily charts, you might find that you only get 2-3 good setups in a single week or even less.

Some very long term strategy using the weekly charts will only give you 1 or 2 setups in a month. Some might only give you 3-5 great setups in a year. So, the thing to take note here is to look at your strategy and determine how many times (how frequently) a great setup appears in a given time period.

When you study history and realize your trading strategy gives you 5 great setups in a week, it makes sense to take 5-7 positions in a week. If you trade more than 10 times, odds are you are not being selective enough or are just having itchy fingers. Pulling the trigger when something looks like a setup.

Reward To Risk Plays A Role

I think that Reward to Risk does play a small role in the amount of positions you should have at any given point in time. It also plays a big role in how many NEW positions you should initiate at any given time.

An unlimited reward with limited risk strategy, like trend following strategy enables you to hold a position longer
A limited reward with limited risk strategy, like trading support and resistance will compel you to sell your position when it reaches the support or resistance area and hence you need to close out the position soon
Have a limited reward but unlimited risk strategy? No comments, just that you should not be trading this one.

Experiment With What Works For You

The best way to determine how many positions that you should have at any moment is to experiment with it yourself. As you analyze and examine things, ask yourself these questions:

Am I able to handle lots of positions without confusing myself?
How many great setups that my strategy give every day, week, month?
Is my trading strategy trend following or have a target?
Am I making money?

The best way to determine I guess is to see if you are making money. If holding too many positions is making you lose focus and making you lose money, then it is time to scale back. Sometimes, its not the amount of positions that matter but the amount of profit each positions is giving you. You do not need to trade all the Facebooks and Googles and Amazons of the trading world. You just need to have what works for you.