Home Trading Strategies Stock Risk Management: How To Calculate Your Position Size

Stock Risk Management: How To Calculate Your Position Size

Stock Risk Management: How To Calculate Your Position Size

okay now let’s move on so in this section I want to discuss about risk management for stock trading all right this is an important concept doesn’t matter whether you’re trading stocks Forex futures bonds or whatsoever risk management is paramount for trader or a speculator or whatever it’s paramount and let me explain to you know why risk management is so important right because you can have a profitable trading system that makes money otherwise known as an H but if you do not have proper risk management it doesn’t matter you’re still gonna blow up your trading account and let me prove it to you so let’s assume right that there is this trading system right it means 50% of the time with an average of a one to two risk reward ratio what does risk reward ratio means is that for every dollar that you risk right in the long run on average right you will get back to dollars in profit so if let’s say you risk $100 right your profit right in the long run is $200 so that’s a risk reward ratio of a one to two meaning that you know for every dollar you rece you get back two dollars in short and let’s say that there are two traders right John and Sally John is a great chief traders go big or go kind of trader and he risk 50% of his account on each trip whereas Elish is more conservative and she only risk 1% of her account on his trade so let’s say you know they both have a let’s say to keep things simple 100k account so what this means is that John right whenever you put on a trader he would put 50% of this amount which is $50,000 and risk for each trade means if the trade hits his stop-loss he’s down $50,000 whereas Ellie she risk 1% of her come on each trait so this means 1% of 100k which is a thousand dollars so this means if a trade hits Sally stop-loss right she loses a thousand dollars and let’s say hypothetically right the the next ten trades the outcome at this outcome loose loose loose win-win loose loose win-win-win so it’s again half of them are losers half of them are winners and now john since he risk 50% of his account on each trade can see that you know over here loose and loose right by here he has essentially wiped up on the secondary because he risk 50% of his account on each trip so let’s just give John a big fat X so sorry to all the John’s out there nothing against you just a common name that I decided to go with how about cellie okay so cellie let’s have a look right so loose loose loose right so he’s minus 1% minus 1% minus 1% win-win right so you know again when she wins right she gets an average of a one to two risk reward ratio so if he wins she makes two times the initial result is positive two percent plus two plus two again here minus 1 minus 1 minus 1 minus 1 then win-win-win right so let’s do it here plus 2 plus 2 plus 2 so as for cellulite what is the net outcome for her what’s the net profit that she’s she may have you calculated right you know that she is up a positive return of 5% and compare that with John who grew up his trading account you can see that clearly right having power a profitable trading system is not the only part of the equation you still must take into account your risk management because as I’ve just shared with you a profitable trading system without proper risk management will still cause you to lose in the long run so risk management is paramount and in this case writes le who risk 1% risk on each trade right end up you know making a positive return over time so now the question is how do you you know put on your trades such debt if the trick hit just stop loss you lose not more than 1% of your trading account how would you do that ok so I’m gonna show you how to do it it’s very simple this is a spreadsheet that you know I I developed myself you can just Google stock trading position sizing calculator and you probably can find something similar so what you’ll do is that I get most of this calculators perform in the same way you just put in what is your your capital so let’s assume with 100k okay and your risk is 1% okay let’s say you wanna buy a stock and you will identify what is the entry price that you’re gonna buy the stock and what price will you buy so let’s say we keep things simple you buy $800 and let’s say at a stop light your stop-loss right for the trick is that dollars so what this will do is that you will see that this value over here is the risk dollar this simply is a function of this one percent multi I mean one percent of one hundred thousand this gives you a thousand dollars over here how about the number of shares there is 50 how do you get this value of 50 again very simple you just take this are thousand dollars divided by twenty dollars why 20 dollars because there’s a difference between your buy price and your stop loss level right I repeat right the difference between your entry price and your stop loss level that is twenty dollars so you take your risk amount right the notional amount divided by these twenty dollars it gives you the number of shares which is fifty okay and what this means is that if you put on the trade set your by point and her dollars stop loss at eighty dollars you buy 50 shares you put in a 50 number of shares and if the trade hits your stop loss you will lose a thousand dollars on the trade which is equivalent to the one percent risk of your initial capital okay so there’s one a couple of things that on a point on right so your number of shares that you buy it’s it’s it’s never fixed yeah it’s dependent on on a couple of things number one the title your stop-loss right meaning let’s see now instead of $80 stop-loss we have a $90 stop-loss so this means your buy price and your stop loss level now is only $10 so the title your stop-loss right the higher the number of shares you can buy while you still keep your is constant okay and likewise if you increase the size of your stop-loss so let’s see now is a $50 notice that you only can buy 20 shares at this point in time okay so the number of shares that you buy is a function of the size of your stop-loss the wider it is the lesson number of years you can buy the tighter it is right the more the number of shares that you can buy all right and still while keeping your risk constant over here needless to say if you increase your risk of money if you reach like you know like John 50 percent right you can buy more shares right by the same time right you risk losing 50 percent of your account in this case okay so this is a very simple stop position sizing calculator you can google it all right and I’ve just pretty much shared with you the formula and how it works right play around if the figures right and you’re pretty much you know understand how risk management works in stocks okay so with that said let’s do a quick recap shall we my suggestion is again right if you are getting involved in trading right try not to risk more than 1% of your trading capital as priority example I just shared with you earlier right so most traders are usually between the realm of you know one two percent but I would say just stick with one percent if you can reach more like point five percent go hit right because the smaller your losses right the lesser you pay tuition fees right to the market second thing to notice that the title your stop-loss right the larger you can put on your position size the more the number of shares you can buy while still keeping your risk constant and as finally right the larger your stop-loss right the smaller the number of shares that you must buy right to keep your risk constant okay so with that said right I’ll see you in the next section you


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