Risk Management

[mahamuni 5]

I am confused with risk management...

Lets say I have 25000 in my account.

I bought 100 shares at $55/share.  So it cost be $5500.  If I do not want to risk more than 1% then what would my stop be?

Is it 1% of 5500 or 1% of 25000.  

If it 1% of 25000 that does not make sense to me.

If it is 1% of 5500, that 55 cents per share.  That seems alot also to me?

Can someone throw a light on this with some examples possible.

TIA

Munish

[Robert H 453]

A better example is taking 1,000 shares with a $25k account. Since your buying power is typically 4:1, you can take a position up to $100k using leverage.

1% of your account is $250. This means 0.25/share on 1,000 shares.

The important part is to find a stop loss at a technical level, and figure out the per-share loss. This will determine the maximum share size you can take. Stop loss first, share size after.

Using the same numbers above, a 0.50 stop loss would mean taking 500 shares. And so on and so forth.

The 1% rule is a maximum. You can always risk less, but never more.

When I traded 100 share lots, I pretended that my account was $2,500. All risk management and daily goal/loss calculations were based off $2,500 and not the full size.

[Abiel 474]

See chapter 3 in 1st Andrew´s book or Chapter 7 in the new one (position sizing):

Step 1: 1% of your account (max risk per trade)

Step 2: Risk per share: (this depends on strategy) 

Step 3: Step 1 / Step 2 = Max number of shares you are allowed to tarde

You can risk less per trade as you are a begginner...

[Abiel 474]

See this post for a Hotkey that calculates # Shares based on max dollar risk:

 

 

[mahamuni 5]

Hi Robert

"The important part is to find a stop loss at a technical level.  That is the AHA moment for me."

Thanks

Munish