It is necessary to adhere to simple risk management rules to protect ourselves. We can only control ourselves ,we cannot control the behavoiur of the market.It is absolutely essential to have the brakes applied with proper risk control.
The suggested risk control is though left to individual trader based on his/her experience,novice trader requires to adhere to
simple risk of 0.33% of trading capital employed at each trade.This can be illustrated as under:
Initial capital 10000
risk capital 0.33%=10000*0.33/100=33
This risk capital is the capital at risk i.e STOP LOSS ABSOLUTE AMOUNT that a trader can put to risk.
- For e.g If the price of the instrument is 100
- Stop Loss 98
- Risk per unit is 100-98=2
- Trading CAPITAL AT THE TIME OF TRADE 10000
- Risk Capital 0.33%=10000*0.33/100=33
- No of units to be bought=33/2=16(Approx)i.e risk capital/risk per unit
Note: Capital will change at every trade. If above trade delivers a profit of 5, THEN THE SCENARIO OF NEXT risk capital will be as under:
No of units bought=16
Profit per unit=5
Here new capital for trade is 10080.
The risk capital for new trade will be 10080*0.33/100=33.264
If the trade does not turn profitable, then scenario will be as under:
Loss=100-98=2 per unit
New Capital at risk will be 9968*0.33/100=32.89
Now This amount OF 32.89 is the absolute stop loss amount That A TRADER CAN PUT TO RISK.
In this scenario, new capital at trade will change with every trade there by reducing the chances of unlimited losses.
This way a trader will be in the market for a very long period of time and will have improved chances of great learning curve.
A trader may devise his /her own risk management rules with experience and optimise the same for increasing profit potential.
Assumptions of the above document :
1. STOP ORDERS have to be FILLED.
Limitations of above document:
1. Sometimes market conditions make it difficult for stop orders to be filled and our trading losses can be more than planned STOP
ORDER losses. It is a hard reality of any financial market trading and have to be fully absorbed by us.All the same, Experience is
the best teacher and market is the best guru.