Akash Bhattacharjee

“Three-Step Risk Management Step 1: Determine your maximum dollar risk for the trade you’re planning (never more than 2% of your account). Calculate this before your trading day starts. Step 2: Estimate your maximum risk per share, the stop loss, in dollars, from your entry. I will explain later in this book what the stop loss should be depending upon which specific strategy you are planning to trade. Step 3: Divide “1” by “2” to find the absolute maximum number of shares you are allowed to trade each time. To better illustrate this, let’s return to the example of MOH from a few pages back. If you have a $40,000 account, the 2% rule will limit your risk on any trade to $800. Let’s assume you want to be conservative and risk only 1% of that account, or $400. That will be Step 1. As you monitor MOH, you see a situation develop where the VWAP Strategy (see Chapter 7) may very well work in your favor. You decide to sell short the stock at $50, and you want to cover them at $48.82, with a stop loss at $50.40. You will be risking $0.40 per share. That will be Step 2 of risk control. For Step 3, calculate your share size by dividing “Step 1” by “Step 2” to find the maximum size you may trade. In this example, you will be allowed to buy a maximum of 1,000 shares. In this case, you may not have enough cash or buying power to buy 1,000 shares of MOH at $50 (because you have only $40,000 in your account). So instead you will buy 800 shares or, perhaps, even 500 shares. Remember, you can always risk less, but you are not allowed to risk more than 2% of your account under any circumstance.”
― AMS Publishing Group, Intelligent Stock Market Trading and Investment: Quick and Easy Guide to Stock Market Investment for Absolute Beginners