Investing - Part 3

Baseline Rebalance Strategy — Part 3: A Real-World Example of Position Sizing and Execution

Now that you understand the core principles of the Baseline Rebalance Strategy and how to size a position using ATR, it’s time to walk through a step-by-step example using real logic — not overly convenient math.

In this post, you’ll learn how to:

✔️ Allocate capital based on controlled risk.

✔️ Use ATR to size positions intelligently.

✔️ Calculate a target investment size — and take only half of it as your initial entry.

✔️ Set your baseline and rebalance using your rules.

The Setup

You have a $20,000 account and plan to eventually hold five positions.

You’re willing to risk 2% of your total capital at any one time.

Rather than allocating $4,000 per stock by default, you’ll:

• Set $400 total risk (2% of $20,000).

• Divide that across 5 stocks = $80 risk per stock.

This keeps your risk consistent, even if your dollar amounts differ.

Let’s apply this to a fictional stock: XYZ Corp.

Step 1: Calculate the ATR

You check the 14-day ATR for XYZ: $2.00

This means the stock typically moves $2.00 per day.

Step 2: Calculate Position Size (Shares)

Position Size = Risk per trade ÷ ATR

$80 ÷ $2.00 = 40 shares

Step 3: Calculate Target Investment Amount

Assume the stock is currently priced at $40.00

40 shares x $40 = $1,600

This becomes your target investment for XYZ.

Step 4: Initial Investment = Half of Target

As outlined in Part 1:

Initial position = Half of target investment

$1,600 ÷ 2 = $800 initial investment

You will place an $800 buy order at the previous day’s pivot point, not the current market price.

Step 5: Calculate the Pivot Point

Let’s say yesterday’s data for XYZ was:

• High: $41.00

• Low: $39.00

• Close: $40.50

Pivot = (41 + 39 + 40.5) ÷ 3 = $40.17

You place your order pre-market to buy $800 worth at $40.17

$800 ÷ $40.17 = 19 shares (rounded down)

Step 6: Set the Baseline

Your baseline = the value of this initial investment.

19 shares x $40.17 = $763.23

This is your baseline — your anchor for future rebalancing.

Step 7: Stock Moves Up — Rebalancing Example

A few days later, XYZ rises to $43.00

19 shares x $43.00 = $817.00

Your position is now 7% above baseline.

Action: Sell enough shares to bring it back to baseline.

Difference = $817 - $763 = $54

$54 ÷ $43 = 1.25 shares

Sell 1 share

Now you can optionally increase your baseline by 10% if technicals still look favorable:

$763.23 x 1.10 = $839.55

Step 8: Stock Pulls Back — Buy the Dip

XYZ falls to $38.00

Remaining position: 18 shares

18 x $38.00 = $684.00

$839.55 - $684.00 = $155.55 under baseline

$155.55 ÷ $38 = 4.09 shares

Buy 4 shares

New holding: 22 shares

Conditions are now weakening, so you might reduce your baseline by 5%:

$839.55 x 0.95 = $797.57

Recap of the Process

1. Start with total portfolio and define your overall risk (e.g., 2%)

2. Divide that risk across the number of stocks (e.g., 5)

3. Use ATR to determine position size per stock

4. Calculate target investment = shares x current price

5. Initial buy = half of target, placed at prior day’s pivot

6. Set your baseline = initial position value

7. Rebalance at +/-5% of baseline

8. Adjust baseline only on trade days, never beyond full target size

Why This Works

✔️ Capital flows naturally into less volatile stocks

✔️ Volatile stocks are sized down automatically

✔️ All trades are mechanical — no chasing, no fear

✔️ Risk is always controlled at the portfolio level

Coming in Part 4:

• How to manage multiple open positions using this strategy

• Portfolio balancing

• Position rotation and resetting baselines over time