a guest Sep 9th, 2019 2,212 Never
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- BASIC RISK AND MONEY MANAGEMENT
- The most important rule in investing/trading is to protect your capital at all cost. Protecting your capital is more important than missing an opportunity; once you lose your capital it's game over but there will always be opportunities in the market. That's why you must use a stop loss (sell stop order) on every trade.
- 1% Risk Rule Definition
- This could also be the 2%, 3%, 4% or 5% risk rule. The 1% risk rule means you don’t risk more than 1% of your capital on a single trade (it's recommended to avoid the risk of ruin, so you can be wrong several times in a row). There are two ways traders can apply the 1% (or whichever percentage they choose) rule. The first is to only use 1% of capital to buy a single asset (Equal Dollar Method). The second is to use as much capital is needed for a trade, but apply a stop loss to the position so no more than 1% of the account is lost if the trade goes the wrong way (Equal Risk Method).
- Further Explanation of the 1% Risk Rule
- The rule is applied so that no single trade causes a massive loss in the account.
- Day traders and swing traders typically only risk up to 1% of their account on any single trade, and use the stop loss approach (Equal Risk). For example, a trader with a $30,000 account can risk up to $300 per trade if risking 1%. Assume they buy a stock at $15, expecting it to go higher, and place a stop loss (a stop sell order which exits the trade) if the price drops to $14.90. The trader buys 3000 shares, because if they lose the $0.10 per share ($15 – $14.90) on 3000 shares, they have only lost $300, or 1% of their account. With a looser stop loss at 14$, he can buy 300 shares at 15$. In both cases he loses 300$ if the stop is triggered. The looser the stop the smaller the profit, but protecting your capital is the number 1 rule. Be aware that a stop loss can be triggered much lower in case of low liquidity. Gaps are common with stocks, especially after earnings. If you buy a stock at 15 and put a stop loss at 14.5, it doesn't mean you will automatically sell it at 14.5. If the next day the stock drops 50%, your stop will be triggered at the first available bid price at 7.50$.
- 1. determine how much of your total capital you're willing to risk per trade
- 2. place your stop loss on the chart
- 3. determine your position size (the number of shares you can buy): https://chartyourtrade.com/position-size-calculator/
- Trading is hard. Don't trade if you don't have an edge. Deciding when to enter a trade, where to put a stop loss and when to exit requires skills.
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