Why Position sizing is important, Consider the following example:
Vicky starts trading with a capital of Rs. 1,00,000 and he finds a trading opportunity and buys ITC stock for Rs. 100. At the max, he can buy 1000 shares of ITC stock. 1/n
Vicky starts trading with a capital of Rs. 1,00,000 and he finds a trading opportunity and buys ITC stock for Rs. 100. At the max, he can buy 1000 shares of ITC stock. 1/n
Now if the stock gains 110 in few days, he will gain 10*1000=10,000. That is 10% of his capital. He sells all his 1000 shares, making 10% returns in short span, makes him more happy and wants to try his luck again.
Consider if he makes an purchase again of 1000 shares at 100, what if the stock goes down to 90 from 100? He will lose 10% of his capital in short span of time, but he may hold the stock and if continues to slide 90, 85, 80. He panics & sell all his shares at 80, losing 20%.
What made Vicky panic? ITC stock falling from 100 to 80?
No. Its 1000 shares that he bought made him panic. Over leverage kills.
No. Its 1000 shares that he bought made him panic. Over leverage kills.
Imagine, if he bought only 100 shares based on position sizing, Stock falling from 100 to 80, results in 2000 loss. Which is just 2% of his capital. In this situation, Vicky might be in a better position to make wise decision.
So next time you buy a stock follow the below rules.
So next time you buy a stock follow the below rules.
Once you trade based on apt position sizing , no matter where the stock moves, you will always able to control your emotions and manage your risks effectively.
