Do you recall your very first investment? What did you think about the most, aside from the reasons for purchasing a share of the company? SPY ETF was my first investment. I didn't know much about any company at the time, but I wanted to buy something. The first question that came to mind during that decision-making process was, "How many shares?" "Should I invest all of my money?" Then I purchased it with half of my capital. Was that the right decision? It is determined by the outcome of the trade. I read about trading to satisfy my curiosity, and I learned that trade size management, or money management, is the most important aspect of trading. Because you can manage the risk if you do it correctly.
"How much should I invest per trade?"
So I wanted to see why it was so important by trading it in various amounts of capital. First, I used all of my capital to trade. I knew it as soon as I pressed the buy button. Despite the fact that I knew the company had strong fundamentals and was in a good technical position, I was deeply uncomfortable. Because that was all I had. I couldn't sleep and awoke early to check the pre-market trade to see if it gapped up or down. It didn't take long for me to realize that this was not the way I wanted to trade or invest. Next, I experimented with a small amount of money. My account balance was not changing at all. Finally, I tried what most famous traders and trading books suggested. Despite the fact that it was moving down, I was emotionally at ease. And as it progressed in the expected direction, compounding boosted the numbers to grow, which was exactly what I was looking for. This is the most important thing to understand before investing your money, regardless of whether you rely on company fundamentals or charts. I'd like to share what I've learned about position sizing and trading money management with you. It appears to be a simple rule, but it is important to understand.
How would you know if you'd made a mistake? What is the metric that can indicate that you were mistaken? This is an important point to understand before purchasing a stock. You must understand when to leave the position. Personally, it depends on the stock's historical volatility, but it's usually around 10%. With that exit point (Stop loss) set at 10%, I can calculate how much I should invest. Assume you can lose (risk) 2% of your capital on this trade. You can calculate the amount you should invest by converting the 2% risk you're taking to a 10% movement on investment. To do this, divide 2% by 10%, yielding 20%. Then multiply 20 percent by the total amount of your capital. Assume you have $10,000 to invest. You should invest $2,000 in this case. You will allow your investment to fall by 10% "per trade," but even if you are stopped out, it is only 2% of your total capital. This was fascinating and magical to me.
Once this first trade is profitable, you can re-size your next trade in the same manner. As the account grows in size, you can contribute more capital to fill more of these positions. Your account would grow over time as a result of the compounding of these successful trades.
I've been losing money consistently since I began investing and trading, and I've been wondering why for a long time. After implementing this position size management rule, I noticed that my account's overall capital was increasing. If you're having trouble investing or trading right now, I recommend you try this.
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