WHY POSITION SIZING ?
Position Sizing is important to be followed strictly to make sure that you’re trading with the right number of shares. It minimizes your loses & preserves your capital. It’s a known fact that most of the Traders face huge loses just becasue they don’t follow PS. Now following PS doesn’t mean that you can’t trade big. Of course you can trade big but you need to make sure that you’re also following the right PS. You will be clear what I’m talking about when you read the blog further.
WHAT IS POSITION SIZING ?
Position Sizing is the method to decide how many shares should you be trading with in a single trade. Simple !
HOW TO CALCULATE POSITION SIZING ?
Firstly you need to decide the risk that you’re ready to take. I will consider taking a 5% risk in each trade, according to the experience that I have. You can reduce it according to your feasibility of taking risk. Remember that the risk taking capacity differs from person to person. So if I have 20k as my capital, I will trade with just 10k and I won’t touch the rest of the 10k. So basically I am not putting my entire capital into the trade. So 5% of 10k will be 500. So I am ready to lose Rs.500 in a single trade. So now we know that the maximum we’re ready to lose is Rs.500, so even if the SL is hit it won’t bother us much.
Now the second part is to decide the maximum Stop Loss (SL) for a particular scrip. Below mentioned is the way to decide the maximum SL:
For a 100 Rs stock, Take the max SL as 1 Rs
For a 200 Rs stock, Take the max SL as 2 Rs
For a 300 Rs stock, Take the max SL as 3 Rs
For a 400 Rs stock, Take the max SL as 4 Rs
For a 500 Rs stock, Take the max SL as 5 Rs
For a 600 Rs stock, Take the max SL as 6 Rs …. So on & so forth !
Now remember, the SL I am talking about is a raw/rounded number so that you can calculate it mentally when you’re trading & you should not be wasting time in calculating the stuffs. I am sure you can easily calculate how much is 500 divided by 1 or 500 divided 2. It wont even take a fraction of second for you to calculate that. So we save a lot of time here.
“FORMULA FOR CALCULATING POSITION SIZING IS, DIVIDE THE RISK BY THE STOP LOSS”
To explain this further, to calculate position size, divide the risk (500) by the SL (for a Rs.100 scrip, it’s Rs.1). So here the maximum shares that you should be trading is 500/1 = 500 shares.
Similarly if you’re trading a Rs.200 scrip, your position size would be 500/2 = 250 shares.
Important thing to note here is, YOU SHOULD NOT BE CHANGING THE RISK AMOUNT. If you have decided to risk out Rs.500 then you have to keep it constant for all the trades, irrespective of the stock price. Or else the entire purpose of using PS will be defeated.
I hope it’s clear now and if you follow this, I can bet that even if ur multiple SLs are hit, overall you will be in profits. But the overall profits should be calculated on a weekly or a monthly basis. Like this there are many things that a day trader should be following religiously. The point is, how badly do you want to achieve a thing, how hungry are you to reach the point that you have targetted for. If you’re really serious about being successful in Trading then you need to stop making excuses to yourself and follow the right things that will actually keep you taking nearer to your target.
Wipe out the idea of making quick money from the market. You will not learn anything at all & you will surely end up losing a lot of money. And until & unless you learn, it’s practically impossible for you to sustain in the market. So please consider my suggestion & trade wisely with a strict POSITION SIZE !!!
There is nothing more satisfying than seeing yourself growing in the path that you always inspired for …
HAPPY TRADING !!! 🙂
Allright, so lets say you're trading a 300 Rs scrip and you're in a buy trade and the stock is really really bullish and is spiking up like crazy. From 300 it went to 305 & then to 311 & then 322 & then it even went up till 330. But suddenly when the price...