Small caps are like high Beta Pictoris asteroids.
In Kunal’s experience,
“Position sizing and risk management for small caps are totally different than for the more liquid S&P traded brothers. Due to the increased volatility and price action, risk management is key. So, I never risk more than 3% of my account on any small cap trade. Also, stop-losses must be wider due to the pumping, rumor mongering, and news driven action.”
Kunal was generous to share his position sizing Excel model with us (click here to download). In order to use the model properly, Kunal provides an illustration: “Once I set my stop-loss at 10%, and my risk if I get stopped out is 3% of my account, then I can buy X amount of shares per the model’s calculation.”
For those of you tempted by the quick riches of small caps, remember there are millions of people who lost huge sums of money for every one person who won the lottery. If you are a novice trader, you will never last in this game without an additional safe strategy for consistent profits. If you are more advanced, Kunal offers a great way to start experiementing with small cap trades.