View: stockbee: How to approach per trade risk

Number of shares to buy= 1000/(entry price-stop price)

Total account capital=$100000

1%=$1000

Stock to enter= XYZ

Entry price= 25

Stop (minl3)= $24.50

Risk per share= 25-24.50=.50

$1000(1% risk)/$.50=2000 shares to buy

2000* 25 (entry price)= $50000 worth of stock to buy.

So for a $100000 USD account, I will buy 2000 shares of this stock or invest $50000 in this one XYZ stock.

If I get stopped out after buying this stock position, I will lose 1%, or $1000 which is (entry price-stop)

In this kind of an approach you can get fully invested in 3 or 4 positions by just risking 1% per trade. If you have 4 positions open with 1% risk each then you have 4% at risk. If you find a situation where the distance between stop and entry price is small then you can have a big position in a stock with just 1% risk. If you see some of the trades I did last year, there were these kind of situations where I had anywhere from 50% plus to 105% plus on single trade but my risk was below 1%.

The basic assumption in this calculation is that you will be able to get out at stop price and stock will not gap down significantly below your stop. That is where your skill in selecting stocks to trade and selecting entry point comes in. If you see my overall trades over many many trades there are negligible number of trades with 10% plus loss. There were only 4 trades with above 10% loss and out of that only one trade where loss was more than 10%. The worst loss on a trade was 12.28% on a single trade on invested capital. But as a % of account that loss was only .92% loss. Overall out of all trades only .04% trade has a loss of 1% plus on overall equity. The worst loss was 1.77% but on that particular trade the risk was 2% so it was still below pre determined risk.

The kind of approach I use can help you quickly ramp up your gains under right conditions. Your risk is of a stock gapping down more below your stop and making 1% risk much bigger risk. One of the ways some people reduce that kind of risk is by specifying a limit on a single trade size. Like saying 1% of account at risk but individual position should not be more than 30% of account. Or by specifying only 6% of account should be at risk at any time.

You can use Telechart PCF to do above calculation instead of using my calculator. That is quicker way to find how many shares to buy once a Trade Alert is issued. For that follow following steps.

Let us assume you have 100000 in account.

Then a PCF for deciding number of shares to buy for 1% risk will be  

100000/100/(c-l)

This assumes your stop is low of the day.

Now you need to change your capital amount everyday for this pcf to work. Let us say you closed a trade and your new capital base in 130000 then the pcf needs to change to

130000/100/(c-l)

The risk approach above should be married with other things like market timing, situational awareness, stock selection, and your cumulative returns till date. As you will see I take smaller risk positions if market direction is uncertain. Similarly I risk less when market is in extreme zone and has higher probability of reversal. Same way not every idea is worth risking 2% or 5%. So very few trades have that kind of risk. There is also phasing of risk. Once you are up 50% plus in first few months your risk strategy can either protect that profit or use that profit buffer to go for a kill. These are all variables which are under your own control and you have to use them based on situation. 

Overall as a general observation, concentrated position is key to high returns. Diversified positions reduce risk and returns. Concentration builds wealth, diversification protects wealth. Your risk approach should be based on what stage you are in. Are you in wealth building stage or in wealth protection stage. That question depends on each individuals specific life situation. Every trader has different risk tolerance and based on their situation they should find their own risk management strategy.