Thread by @zsetrader

The 1% to 2% Rule.
[A Thread]

I have seen a lot of people committing suicide in the market thinking that well if this analyst says BUY this stock it will double or triple x times because of so andso. In this thread I will outline with an example the importance of risk management in particular position sizing.

As you know your most valuable asset is capital, and we always want to protect it at all times. Capital makes a difference in the market an increase of $BNC from Z$3 to Z$4 means that one has made:
A. Z$100
B. Z$1 000
C. Z$10 000
D. Z$100 000
E. Z$1 000 000

And this means you have to always safeguard your capital. This means you have to know when to buy, hold, sell and the quantities relative to your portfolio.

The investing majority (both novice and experienced) just dump Z$10 000 into $ECO or $DZL and hope it goes up and most don’t account for downside. This means you don’t know when to cut your losses if and when it comes to that.

I have shared how one can essentially make money when the market is down or going down and here is it is one more time if you don’t manage to find the post.

When a stock is on a decline from a high you sell, and buy as it hits the support. For example if you had 1 000 $ECO shares and $ECO hits Z$10 and begins the decline to $4.50

You sell at a net of Z$9 per share and have Z$9 000 then you hold the cash and it falls to around Z$4 but you buy for a net of Z$4.50 per share which means at the end of that trade you have 2 000 $ECO shares.

If the stock then jumps to around Z$6 you make a solid profit because that means your shares are now worth Z$12 000.

This is important because you protect your capital and gain more shares. Essentially nothing fundamentally has changed in relation to the company but 1. your capital remains intact and 2. you gain more shares.

This might take a while to master at first but you will eventually master and you will not regret once you master.

POSITION SIZING
For the purposes of this topic and this topic only lets make the following assumptions.
A person named Z.
Total a trading account value is Z$100 000.
Uses the 2% rule instead of the 1% rule.

Now let’s assume that Z wants to buy some $MSHL which are trading at +/- Z$2.55 because he/she thinks it will go up to Z$3 or more. Z also makes a decision to accommodate a downside of 55c per share which means Z will cut his loss at Z$2.

Now he wants to calculate how much money he/she should risk and shares he/she should buy.

The 2% states that you cannot in any trade lose 2% of the total account value. Which translates to Z$2 000 per position or trade.

Okay let’s recap the facts, we said Z cannot lose Z$2 000 total on any position or trade and Z is willing to take a downside of not more than 55c.

To get the number of shares Z should buy we then divide Z$2 000/Z$0.55 to then get 4 000 shares and this means Z will have to buy 4 000 shares x Z$2.55 (Z$10 200 worth of shares excluding the trading fees.)

Meaning if Z buys $MSHL at Z$2.55 and the price drops to Z$2 and Z sells he/she makes a loss of not more than Z$2 000. However as we know the stock might go up but the lesson was on knowing when to sell and how to size up your positions.

I have been going through some of @Nemaungwe’s videos on YouTube (which I highly recommend you do) and he talks a lot about detaching emotions on entry and exit points if a trade hits your stop loss get out!

@Nemaungwe we need more regular updates on the YouTube channel...

We have people who bought $ECO at Z$10 and are still holding and now its at Z$4 and this means someone is sitting on a loss of Z$6 per share which could have been avoided if he/she followed the 1% to 2% Rule.

I will leave you with this “Better three hours too soon than a minute too late.”

THE END.