Money Management

As you will spend more time in the Stock market, you shall realize that money management is the heart of trading. Even a good setup won’t make you profitable if money management is lethargic. We thought of providing the outline for money management for easy reference.

A. Novice Traders: Traders who are not 2 years old in the stock market will be termed as Novice.

Risk: Never risk more than 0.5% of your capital in one trade. It’s 0.5% of capital and not the leverage that you get on your capital.

You will notice that a newbie will have some great profitable trades as soon as he starts trading. A newcomer’s luck is what it is called. 2 profitable trades and the newbie starts thinking of himself of a PRO. He thinks that it’s difficult to lose money in the stock market and people who lose money must be real retards.

As soon as he starts thinking like above and takes next trade, stock market resolves to introduce self to the newbie and takes away all the profits plus part of the capital.

If the newbie does not realize his mistake of assuming market to be a smooth ride and keeps doing what he is doing then no one can stop him from losing capital.

If you are a novice and really determined to learn about the stock market then keep your stop loss fixed to 0.5% of capital.

Example: 500 would be Stop loss if Capital is 1 Lakh

Buying a scrip where stop-loss works out to Rs. 10 per piece, then quantity will be decided by dividing 500 (0.5% of capital Rs 1 lakh) with 10 (Stop loss per piece) = 50

 

B. Experienced Traders: Traders who are into the stock market for more than 2 years but less than 10 years.

Risk: 1% of capital per trade is the maximum risk to be taken. It’s 1% of capital and not the leverage that you get on your capital.

These traders have seen small cycles of the stock market. They have also experienced some major events during their tenure in stock markets. Events like elections, trade wars etc. They are in better position as compared to Novice when it comes to understanding the market sentiments. They have also paid the price of being indiscipline.

Since all days are not the same and there might be more volatile days and less volatile days. 1% Stop loss will take care of most days and give an edge to experienced traders to stay profitable.

1% stop loss does not assure profitable P&L. Need to also work on set up and look for better Risk reward ratio.

Example: 1000 would be Stop loss if Capital is 1 Lakh

Buying a scrip where stop-loss works out to Rs. 10 per piece, then quantity will be decided by dividing 1000 (1% of capital Rs 1 lakh) with 10 (Stop loss per piece) = 100

 

C. Seasoned Traders: Traders who are into the stock market for more than 10 years.

Risk: 2-3% of capital per trade is the maximum risk to be taken. It’s 2-3% of capital and not the leverage that you get on your capital.

Seasoned traders are the one who has seen the bull, bear phase, they have been part of the mother of major bull run and also part of major meltdowns. They are the ones who follow and trade as per the primary trend, secondary trends are not important for them.

Seasoned traders are more learned, informed and aware traders. Hey understand the business cycles and also market sentiments very well. They never take trades based on rumors or news flashed on business channels.

Seasoned players have good Risk Reward ratio in their trades and hence can afford stop loss of 2-3%. They are not afraid to carry their position overnight.

Example: 2000 to 3000 would be Stop loss if Capital is 1 Lakh

Buying a scrip where stop-loss works out to Rs. 10 per piece, then quantity will be decided by dividing 2500 (2.5% of capital Rs 1 lakh) with 10 (Stop loss per piece) = 250

 

All the above view is purely from intraday trader’s perspective. We hope that the same will be useful to limit your losses and make you a small loss and big profits trader very soon.

– Sanket Gajjar & Dimesh Patel

This Post Has 2 Comments

  1. This is probably something easy to say and hard to implement type of rules, but this discipline helps a lot in taking the trade calmly and does wonders on how you approach trading. Very nice article, kudos!

  2. Small sl always hits, before reaching target….

    As a beginner I do reverse to avoid SL hit

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