MONEY MANAGEMENT & POSITION SIZING !!!!

Dear friends, no Sai bhajan till now, no trade updates, no comments. U must all be thinking,whats wrong with rochak. Nothing serious, friends, its just that, i am still under shock. Vishal retail is a big setback for me. But, then u know, markets are always known for doing the unexpected. ( 47 was never expected2b broken ).


SAI CHAMATKAR ( HORSE RIDER ) OF THIS WEEK

Hello friends !

Who doesnt wanna get rich.

& then who doesnt wanna get rick quickly.

& this fact is not under even a % of a doubt that MONEY FETCHES MONEY.

& this money is a big power if used wisely & smartly.

But, at the same time, if not used properly can be devastated quickly also.

Stock market has always been fancied as a place that is believed to make rich quickly & this is actually possible. offcourse, with whole lot of experience, discipline & proper money management.

MONEY MANAGEMENT & POSITION SIZING IS AN IMPORTANT ASPECT of trading in stock market.

First of all, u must always know the exact time frame, for which the funds, u r gonna use for trading, is available to you. & then u shud plan ur trades accordingly.

I have been always believed, that longer the time period is, higher the gains are. U shud first, divide ur capital as per ur requirement.

Suppose a fund of 5 lacs is available spare to you for trading. U shud always know, how much funds out of this 5 lacs, is available to you upto a certain time period.

So, now then, the money which is not required to you for next 3-5 years, shud be kept secured, in order to be used, until u identify urslf a long term bet. Suppose, u dont need 2 lacs out of this 5 lacs for the next 3 years at least. So, u shud keep these 2 lacs apart from the rest of 3 lacs, till u find an appropriate scrip in which these funds can be invested.

NOw, what about the rest 3 lacs ? Well, this amount shud always know its goal. What u wanna do from this fund ? As per as my opinion is concerned, since i believe in longer term returns, i wud keep at least 50 % of the amount for positional trades, i.e. trades which are identified to be initiated for next 6-9 months. so, 1.5 lacs are kept for medium term trades. Now, the rest 1.5 lacs is the amount, which is available to you for ur short term/swing/day/nifty OR any type of trading. Since, the 2 parts of the funds u have kept by you are for medium to long term, u can risk the 3 rd part of fund for trading purpose, b coz, the investment u made, wud actually make u comfortable to suffer some losses, if any, while trading for short term/day trading.

I do not favour day trading. Day trading is the fastest devastation which can happen to your capital. Well, while trading, u shud actually know what for are u in. Trading is a huge ocean. Ur capital is not even a single drop out in this ocean. So, with the limited capital u have, u can not experiment with all aspects of trading, i.e. day/swing/nifty/option/arbitrage/hedge/ etc etc.

U MUST ALL FIRST GO THRU THE FOLLOWING ARTICLE I WROTE SOMETIMES AGO WITH THIS REGARDS----

http://stock2gains.blogspot.com/2010/06/what-is-your-trader-type.html

Well, after having decided, what actually ur goal is, at least 60 % of ur residue capital, i believe shud be kept secured, to back up the 40 % capital u have decided to put into aspect u chosen to trade. B coz, i have seen several traders converted into martyrs on the front of mark to market ( MTM ).

So, that means, 90000 Rs. is to be kept secure to back up 60000 rs. trade. Now, this 90000 rs. hasnt to be kept totally idle. This 90000 rs. can always b used confidentally in case indices are over sold OR over bought. Else, keep this amount idle.

Leverage has always to be avoided. Leverage is the best lollypop, smart & disciplined trades hav used successfully to attract wanna be rich quickly, new bie traders. Well, this 90000 rs. is kept secured only to cover up, in case u have used leverage with the 60000 rs. capital u are supposed to use. SO, in any case, ur trades shud not exceed 1,50000 rs. limit.

NOw comes the position sizing.

Well, all ur bets shud be equally poised. So that means, if have kept x amount secured for trading, ur bets shud be either x/2,x/3,x/4,x/5,x/6 in proposition. I have never believed that one shud hold more than 4 positions at at given point of time. So, let us divide our capital by 4. So, ur single trade shud always be 15000 rs. amount. So, if u r trading in reliance, u wud trade in 15 no. of shares, & if its in rnrl it shud be 375.

Now, stop loss is what, one shud decide himself, that how much he is willing/ready to loose per trade, if the trade goes wrong. NO GAIN WITHOUT PAIN. This depends entirely on ones risk appetite. Ideally, it shudnt be more than 2 %. So, if u willing to loose 2 % on entire trade amount, i.e. means, u can afford to loose upto 300 rs. on a single trade. that means, u shud place SL 300/15=20rs. IN case of a reliance & 300/375= .80 re or 80 paisa in case of RNRL. SO, a SL shud be kept @ 1000-20=980 in case of reliance & 40-.80=39.2 in case of RNRL.

What does this mean, we shud always keep a SL under 20 rs. in reliance & .8 paisa in RNRL , whenever we take a trade. YA, but many a times, when trade is not initiated @ appropriate levels, the chances of ur Sl hitting are higher. So, ideally, after being provided with a SL/Identified a SL, for a trade, u shud wait patiently to scrip to come closer to ur SL, to initiate a trade. i.e. in case of reliance, if SL given/provided is 965, instead of jumping immediately into the trades, u shud wait patiently for reliance to come down to 985-983, before initiating a trade.

This is what money management & position sizing, has been from years, the trading has begun. SOme know, how to apply & some dont, & some know but dont apply. Well, 1 more thumb rule is to cut ur losses early & trail ur profit. B coz, its believed that 80 % of ur profit comes from 20 % of ur trades. That means, 8 out of ur trades are gonna hit the SL, but if money management, position sizing, SL, TSL & discipline is properly followed than ur 2 successful trades out the 10 trades taken are able enough to make up for the losses u have suffered in those 8 trades, if proper discipline is followed.

To know more about the importance of STOP LOSS & TRAILING STOP LOSS, please go through the following post

http://stock2gains.blogspot.com/2010/06/why-to-put-stop-loss.html

Well, i know this is quite a lengthy article, but, i have a descriptive nature & i cant help it. I hope, this article help somebody in developing a disciplined trading approach.

COuldnt get enough time to update the trades & trading table.

But sure, wud be able to update the trading table by tomorrow morning.

ALso, the monthly performance report for august month is pending. Not sure, when i am gonna prepare it. But, i suppose, it will take lot of time, may be, august & september month performance report wud be issued colletively.

HAPPY SAILING

OM SAI RAM.