#TuesdayTip- Does Size Matter?
#TuesdayTip is a new series I have started where I will be sharing small but crucial tips and easy strategies. You can access all #TuesdayTips by clicking here.
So you learnt your first strategy based on the moving average in my previous post. Please read it before continuing further.
The image below is today’s (26th December 2017) daily chart of Just Dial to which I added a 20 day moving average line.
Have a look. Based on my previous post, do you think it’s a buy?
I think I spotted a buy indicator - Stock price rose and closed above the 20 day Moving Average Line. (Circled in red)
But, I have a problem. I have to decide how many shares to buy.
I have a total of Rs. 10,000 for trading.
So at the current price of Rs. 523.8, if I use all my money, I could buy a maximum 10,000/523.8= 19 shares.
Now, if you remember we must calculate target profits and maximum allowed losses,
We have decided out target profit per share is 3.75%,
That is Rs. 523.8*3.75%= Rs. 19.6
So stock must rise to 523.8+19.6= 543.44 and then we will sell.
We have decided out maximum loss per share is 1.5%,
That’s is 523.8*1.5%= Rs. 7.85
So if the stock price falls to 523.8-7.85= Rs. 515.95 we will sell.
(Please re- refer to the post where I explained the moving average strategy to recollect where 3.75% and 1.5% comes from)
Lets compare 3 situations; if we buy 10, 50 and 19 shares and see what our total profit and total losses would be.
As we buy more shares, our total profits may rise but size of total potential losses also rise!!
So, yes. Size of your order does matter in trading!
As a trader, you must have one key rule, restrict your losses.
On a single trade, you will not risk more than 1% of your total money.
So my maximum risk is 10,000*1% = Rs. 100
Here is how I will use this to decide how many shares to buy;
I will buy only those many shares that my total loss would be limited to Rs. 100.
I will simply divide my total risk by loss per share of 7.85 which gives me 12 shares.
If I buy 12 shares, my total risk on this trade is Rs. 95 (Loss per share Rs. 7.85*12 shares) and my total target profit would be Rs. 19.6*12 shares= Rs. 235.2
So even though I could use all my money and buy 19 shares, I will not do so, because I will have too much risk. (see table)
This how professional traders control their risks, they call it ‘position sizing’ and ‘risk management’. Fancy words for a simple concept.
To summarise,
Number of shares is decided as follows:
Step 1
First you must calculate 1% of your total money.
If you have 5000 it would be 50. If you have 25000 it would be 250 and so on.
Step 2
Next find out loss per share on a trade. Usually that is 1.5% of your buy price.
In case of just dial I calculated it as 7.85.
If you buy a share at Rs. 200, your maximum loss per share would be Rs. 3
Step 3
And finally to decide how many shares, you divide Step 1 by Step 2
Let’s take one last example so you are clear.
Assume you have Rs. 25000 and want to buy a share at Rs. 300.
How many shares do you buy?
Step 1: 25000*1% = Rs. 250
Step 2: 300*1.5%= Rs. 4.5
Step 3: No of shares to buy = 250/4.5 = 55 shares
Always follow these three steps when deciding how many shares.
I am going to buy the Just Dial shares tomorrow. I will keep you updated on whether I make a profit or loss.
If you want to take this trade for no risk and see how the strategy works, you can open a free virtual trading account here:
(It is a trading game so no real money needed. Free of cost.)
If you already trade and want to experiment with the Moving Average strategy feel free to test it on Just Dial. The risk will be yours.
Hope you liked and understood today’s post. Stayed tuned for more updates by subscribing or following me on Facebook.
You can always contact me here.
Please note 'Simple Trading' is an educational website and not for investment advisory services.
Do not take trades just because I spoke about a stock, take trades only when you understand the strategy because the risk is solely yours.
You must know that trading involves risks and no strategy is 100% right. Losses are possible and expected.