The Percentage Trading Rule

Most traders would agree that you should not risk more than 2% of your trading capital on a single trade. The stock market is mostly random. No one else is going to tell you this, but this is the reality of trading stocks.

So no matter how good the chart looks, there is a chance that the stock will not go in your desired direction and you WILL lose money on the trade. How much money will you lose if this happens?

On the first of each month, look at the total amount of money in your trading account. Let’s say you have 300000Rs. Two percent of this amount is 6000.00. That is the maximum amount you can lose on a trade.

Position Sizing:

Let’s say that you have scanned a stock that fulfills all criteria’s of your entry position and you are ready to trade it. Say, the current market price(CMP) of this stock is Rs. 1000.
You first have to figure out where your stop is going to be. Do not think about how much money you can make on a trade, think about how much money you can lose if your wrong!

You determine that your stop is going to be at Rs. 970. So if you buy the stock at 1000 and your stop is at 970 then your risk is Rs. 30.00 per share. Since you have already determined that the most you can risk on a trade is Rs. 6000.00 then you can buy 200 shares of this stock.

This is because if you get stopped out you will lose 6000.00, the maximum amount you are ‘allowed’ to lose. Actually the number of shares that you buy should be a little less because you have to account for brokerage and other expenses.

By managing your money correctly on every trade you can relax because if you incur a loss it will be insignificant to your account. This will also relieve the emotional pitfalls that plaque so many traders.

This is only one trade! If you lose money on this trade, just move on to another. If you have a string of several losses in row either stop trading or reduce your position size to 1%.

Be a disciplined trader. Know that money management is your key to survival and success as a trader.

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