These money management rules will help you to identify how many shares you can buy or sell short in a particular trade. This is also known as position sizing.
How big is my risk for one trade ?
The definition of maximal risk value for one trade could vary a little bit. Generally, the numbers used are between 0.5% to 1.5% of the total account size.
Example:
The account size is Rs.10,00,000 . The maximum risk per trade is 1%. It means that you can risk Rs.10000 on every trade. If distance between your entry and stop-loss level is Rs. 20, then you know that you can open trade with 500 shares. Simply calculated by absolute risk.
Should you open trade with 500 shares? No! You must check other money management rules and combine the results. How many opened trades I can have at a time ?
Every trader must limit the maximum number of open trades. The absolute maximum for a single person is 6 open trades. Five or six open trades at any given time as a maximum is an appropriate limit for every trader. And the maximum risk per portfolio at 5%.
Example:
Your swing stock trading account size is Rs. 10,00,000. You decided to have max. five open trades at once. That means you can use 200,000 for one trade. So when you plan to buy XYZ stock with a stock price of Rs. 200, this rule tells you that you can buy max. 1000 shares. Combine it with the number of shares from the previous rule and use the lesser value for your trade setup.
What is my risk: reward ratio ?
Never, ever try to have the risk reward ratio less then 3 to 1. This rule is crucial in your trading statistics, especially if you’re new to trading and without any relevant trade history.
Happy Trading !
