If you are one of many who are in search of the holy grail strategy that can make you tons of money, then this article is not for you. Because here I am going to explain to you the most important topic in trading which is neglected by many amateurs. This makes them blow up their account every time.
So what is the thing I am going to tell that saves you from blowing your account and makes you some bucks?. Before starting I am going to share some articles link which can help you in analysing any company. Here is the link – Learning Zone
Now let’s get started with the topic. Risk Management is the holy grail of many successful traders. Even if you are good at technical analysis or if your accuracy is 80% or more of all of this is useless if you don’t know how to manage your capital amount. Let me say how. If you deploy most part of your capital in a single trade and if it goes against you then it can wipe out more than 20%, even 50% of your capital in just one trade.
How to Manage the Risk?
“TRADE LIKE A CASINO” Casinos always win in the long run. They win because of the statistical edge which is also called as House Edge. You can read about it here – “How Casino Makes Money?”
Steps to be followed
Like a casino, if a trader can stay in the game for the longest time and with a basic edge i.e, ( Loose 1% or Gain 2%) he can ultimately stay on the side of profit. Let me explain the same in detail with the help of following steps
- Don’t risk more than 1% of capital in a single trade
- Enter into high probable trades
- Maintain a fixed stop loss of 1% and a profit of 2%. ( Many vary but profit should be at least double the stop loss)
- Buy a fixed number of shares using this formula
Number of Shares = (risk% per trade*Capital amount)/Risk per share
For example, you have capital of Rs.10000. You want to buy shares of Sun Pharma which is priced at Rs.400. With a risk of 1%, the number of shares will be like follows
With the above set up even with the less accuracy of say 40%, you can be on the profit side. The whole process is called Position Sizing. If you are a beginner do not take leverage it can kill your account within no time. Risk Management is the only thing that can help you to stay in the market for a longer time
Thanks for reading and consider reading this article – BULLS AND BEARS-THE MARKET EMOTIONS