Why Cutting losses using Stops is Important in Trading

 One should be ready with trailing stops for the stocks which are trading near their Stop Loss levels. Don’t hesitate to cut the position at a small loss, it will in-fact help you preserve your capital.

Capital Loss	% gain required to recover the loss
20%	25%
30%	43%
40%	67%
50%	100%
60%	150%

The table above shows how much your account gain to recover the loss, for illustration, if you want to recover the 50% loss on your capital, you need 100% gain on the rest of the capital just to recover your loss and come back to starting capital. The only way to manage big loss is to cut the positions when losses are small! 

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Position Sizing of a Trade - How many share should I buy?

Many people DM on twitter to find out how I do the position sizing. So let me Anser this question for the benefit of people based on my practice and abilities. 

I would like to start with a disclaimer by saying "Below methods might or might not work for you based on your own system and risk profile ".

Let come to the topic, there are multiple ways to figure out how many shares you want to purchase depending on Capital in hand and the risk of losing capital for each trade.

for illustration purposes, I will start with a starting capital of 10Lakh and I can risk 1% of total equity on trade. so that if I have to blow my account it will take substantial knows to get it done. 

However, you should start by identifying how much capital you have in hand for trading/Investing and what %age of risk you can take per trade. Usually, a 1% risk of total capital per trade works for new traders.  

So I am going ahead with 10 Lakh capital and 1% risk-on trade to illustrate with examples.

So we have identified a stock which is trading at 205 and we are guestimating the stop-loss of 175 and target of 305.  This chart below will make it easier for your eyes to understand.

So here are figures which we will take - 

Entry Rate - 205

Stop-loss - 175

Risk/Share = 30

Target - 300

Personally, I usually use two methods to decide how many shares I will buy for a trade. Let us look at this method briefly 

First Method - I would say one of the ways is to have equal weight for each trade like 10% i.e. you invest 1 lakh on each stock trade and the risk 1% or more of full capital which will around  10% of the trade.

 

In this method, I will divide 1 Lakh by 205(entry price) to get the number of shares to buy i.e. 487 shares

So now your maximum risk is 487 * 30 = 14610 which is around 1.5%. It definitely makes it a higher-risk trade. 

Second Method - In this method you decide the number of shares purely of risk%.  

No of shares =  1% Risk Capital divide by Risk per share i.e. 10000/30 = 333 Shares,  in this case, you will invest 68265 rupees to purchase 333 Share.

Now, let us talk about reward in both methods - using a simple formula - 

Reward = no of share x (Target price - Purchase price )

In first method,  you purchased 487 shares * 95 = 46,265 

In the second method, you purchased 333 shares * 95 = 31,635 

Do share your feedback and let me know if you want me to cover another topic to help you to trade better. 

Cheers!