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Predetermine the percentage of your capital that you are prepared to risk on any one trade. To do that, you need to make a reasonable assessment of how many losses in a row you are likely to sustain. |
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For example: If you believe that you might expect to experience a worst case of 10 losses in a row, you might be willing to risk 2 percent of your total capital on every trade, or a maximum drawdown of 20 percent if you have those 10 losses in a row. Looking at the other sideyou would still have 80 percent of your capital remaining. |
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Turn that percentage into a dollar amount. For example: If you have $100,000 in trading capital, 2 percent would equal $2,000, which is your risk per trade. |
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Then determine your risk on this trade. The difference in dollars per share between the entry point and the ISP. |
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Calculate the number of shares you can buy. Divide risk-per-trade by risk-on-this-trade to see the number of shares you can trade. The following chart makes it very easy: |
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Remember that this chart shows the maximum number of shares you may trade to be within your personal money management guidelines. You also have to stay within your capital constraints. For example: If your risk on this trade is $1.50, the chart tells you that you can trade a maximum of 1,333 shares. |
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You then have to look at your buying power to be sure you have the capital to trade that many shares. For example: If you have $80,000 cash in your account, you may buy up to $160,000 worth of stock on margin. If the entry price on the stock you are watching is $150, you may only trade 1,066 shares ($160,000/$150). |
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You've gotten into your trade like a pro. Now let's talk about how you manage this trade to its conclusion. Unlike the entry, which by de- |
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