MONEY MANAGEMENT
MAX RISK
Now we come to another major part of money management that must be looked into...........just as how crucial having a predetermined stop is and proper share sizing,this part is vital for the survival of our trading account and therefore our survival as traders.
If we were to risk 2% per trade and we get into 20 stocks,a move down would trigger all the 20 stops,........we have put proper stops,great.................we have taken small losses,great.....and yet,our account is down 40%.If our trading capital was 10lakhs,well 4 lakhs has vanished into thin air!!This is unacceptable........and unpardonable as far as the trader is concerned.
We therefore have another set of percentages in place so that we are protected from market movements..........now what that percentage is basically comes back to the individual trader and his comfort levels.There are many absolute truths in the world of trading,but no absolute methods,all relative to what our psyche allows us.
For example,I believe that a 2% risk is just too much to bear,I am on the other hand comfortable with a risk of 0.5-0.75%......so there are as many methods as there are traders.Basically tweak to your individual comfort levels.
Now what are these percentage rules of max risk that I am speaking of?
1.In an intraday position,take no more total risk than 4% in that day.Which means that I would take no more than 4 trades at the same time.Why?Because I am risking 1% per trade,and if I take more than 4 trades,I would be risking more than 4% in that day.
Therefore,I enter into TISCO with my stop loss at the previous pivot low at a risk of 1%.Then,I see a great setup in RIL,same thing as above.Now I see a great trade in ITC ,I grabbed that as well.Then a beauty in ACC.Now I have 4 trades running simultaneously,and I risking 4% as of now.I then see a great play in SBI......But my rules prevent me from taking that 5th trade,however juicy that set up.
Now I get a great move in TISCO and ACC,and that gives me the opportunity to raise my stops in the two to breakeven.Now I can take SBI if it still looks great........if it has already run off,well,nothing can be done about it.Missed money better than lost money!!
Also make sure you have your max percent loss in a week after which you wouldn't trade any more,and your max percent loss in a month after which you are no more than a bystander.If I lose 10%,that 's it....I am out for the month.Many put that figure to 6%,or 8%.........once again,your comfort levels.
2.In a swing position that may last up to 4-5 days,once again similar rules come into play.I basically take a max risk of 6%.......now why these figures,well,basically no real reason except years of toying around and tweaking it to comfort levels.As said before you will have to do the same.
So,here again,a risk of 1% per trade allows me to take 6 swings that week.Every time I am able to raise my stop to break even,I am allowed another trade.Else that's that.......
3.In a position trade,that can take up to weeks to months,I tend to take a max risk of 12%,meaning that if you are taking a 1%risk per trade,max number of stocks that can be got into is 12.And then,once you get to breakeven stop in a trade,you are allowed to get into a new position,or add to the previous position.
If you are the type that can take on a bigger amount of risk,fine........but total portfolio risk no greater than 20%.Greater than that,think you would be fishing for trouble.So careful on that one.
It is very important that these rules are in place...........very,very important!!The percentages you as the trader will have to work out.But you MUST have a stop,you MUST adhere to them,you MUST have a risk per trade and share size accordingly,and you MUST have a max risk that you are willing to take,after which you are going to pull the plugs.And you MUST have a point where a bad day or month is accepted as it is ........and all trading comes to an end.If you are out on the 15th day of the month,that does not mean that you sleep and watch TV for the rest of the month.......You come to work as in every other day,you paper trade,and you do it till the end of the month.Your first trade would be the first day of next month.
Discipline is discipline,and rules are rules............These are like commandments in the Holy Scriptures of the Trader.Not observing them is sacrilege,a blasphemy.They,once drawn up,MUST be followed at all cost.
