Risk Management

Risk management is a process of identification, analysis and either acceptance of uncertainty in investment decision making. This is a typical explanation of risk management according to text books. But how to apply this risk management into trading stocks is unknown to many people.

You cannot control the markets but you can control your money and your risk on each and every trade that you make. William O'neill has said that, "The whole secret to winning in the stock market is to lose least amount possible when you are not right".

When you decide to trade a stock, initially you should ask yourself these 2 questions:

1. How much money should I risk on this trade?

2. How many shares should I buy? 

The 2% rule is the one what many traders follow in their money management strategy. Most of the traders agree that you should not risk more than 2% of your trading capital on a single trade.As stock movement is very random and though the charts tell you that stock will move in a desired direction, it might move against the desired direction and you will be on a losing side. 

The 2% Rule:

• At the start of your month, if the trading capital is about Rs 1,00,000, then you can take risk of losing 2% of 1,00,000 ie Rs. 2000.This answers the first question "How Much money Should I risk on a trade?". Next is "how much shares should I buy?".
• If you are buying a share of price Rs. 250. And your stop loss is 240. Then do this simple calculation to know how much shares to buy.

=> (2% of trading capital)/(Entry Price - Stop Loss)

For Above example,

=> 2000/(250 -240) 

=> 200 shares.

• Now You have the number of shares to be bought and capital involved in one trade (200 * 250 = Rs. 50000).
• Most important saying in trading or investment "Cut the loses, run the profits." Saying looks very simple. But people do exactly opposite of this. They run the loses and cut the profits soon. So, do trade with stop losses without miss.

Today's call:

BHARTI AIRTEL: SELL CALL

Scrip name : BHARTIARTL

ENTRY PRICE: 318-316.

Stop Loss: 322.

Target: 308-300

Time frame: 2 to 5 days

Return/Risk: 16/6

Important: If stock opens below 314, then you can see some bearish move in the stock. Then you can follow above entry price and stock price.

*Note: This is just personal opinion. I am not responsible for your losses or profits.