There is a strategy that allows you to completely insure yourself against any loss at all, while at the same time allowing you full upside potential gains. To protect your capital then you would first have to purchase some good quality shares that you or your Stockbroker have the view that they will rise in value.
The trick here is to select one or a few of the big stocks out there, that have a good proven track record and are fundamentally sound. Before you place the trade ensure that you have picked your exit point, and when you will take profits if that is included on your plan.
Now to protect your investment, you will have to purchase insurance in the form of a put option seven to nine months away from expiry. Put options depending on what country you live in, will cover either 100 or 1000 shares. The price of the put option will be around 5% of the underlying share price. You will have to include this price in your break even costs.
Purchase 30% more put options than you actually need to cover your capital. We purchase an extra 30% more put options so as to cover the cost of the option. This is the real key to fully protecting your investment.
If the share price slides down a lot then you actually stand to make a little money because the price of your put options will go up so much that if you do need to sell the underlying shares, then you can exercise your options and walk away with your entire capital back in your pocket.
You will need to keep an eye on the share price if it is staying neutral. The worst case scenario here is that the underlying share price stays quite flat. If this is the case it would be wise to sell your put options a month before expiry, and then purchase another put for a period further out.
If you sell your put more than a month before expiry then you will limit the time decay on your option and will only lose a small portion of the monet that you spent on the put option. This is an awesome strategy that allows you to safely enter the markey and hold big positions, and you can sleep well at night knowing that even if the share price goes down to zero, you will still make some money.
Knowing this sort of information could just be the reason to enter the market and kick start your trading and investing career.
The Indian Stock Market
However, many stock market traders believe that they’re doing an adequate job of position sizing by simply having a stop loss in place. While this will tell them when to get out of a stock market position, and will, with a maximum loss, determine how much capital they’re risking, it doesn’t answer the question of how much or how many units they can buy.
If you have already calculated your maximum loss and your stop loss, you can take these values, and plug them into a formula that will calculate how many shares you can purchase without exceeding your maximum loss. Although it is simple, the formula I’m about to give you is extremely powerful. The number of shares for your position is equal to your maximum loss divided by your stop loss size.
You’re already familiar with what a maximum loss is; but may not be recognize the term stop loss size. A stop loss size is the difference between your entry price and your stop loss value. If you were to enter the stock market with a one-dollar trade and set your stop loss at 90 cents, the stop loss value would be the difference between your entry price and your stock price, ten cents. Once you’ve entered these values into the formula, you can calculate how many shares you should buy so that you never risk more than your maximum loss.
Let’s look at how the formula works in practice. If your trading float was $20,000, and you were risking 2%, your maximum loss would be $400. If your stock market entry price was one dollar, and your stop loss value was 90 cents, your stop size would be ten cents. Now, the number of shares is equal to your maximum loss divided by your stop size. In this example, you can purchase 4,000 shares. If this stock reaches your stop loss, and you have to exit the position, you know you’re not going to risk or lose more than 2% of your float, which is $400.
This formula ensures the safety of your trading float. A little finessing that some of my clients like to do is to class their brokerage fee as part of the maximum loss. You could do this by subtracting the stock market brokerage fee from your maximum loss. If the stock market brokerage fee was $40 for your return trip, subtract 40 dollars from your maximum loss. Instead of entering $400 into the formula, you’d now enter $360. Once this is computed out, you can determine how many shares you’d buy, and know that you had included brokerage as part of your maximum loss.
By setting your position size so that you follow the 2% rule, you’re using a strategy that will limit the size of your losses during losing streaks. When you experience a winning streak, your position sizes will grow in a similar manner. By changing the amount of capital you’re deciding to risk, you’ll change the characteristics of your risk to reward ratio. All of your stock market money management rules will work together to make your trading system as profitable as possible.
David Jenyns is recognized as the leading expert when it comes to designing profitable stock trading systems.
Discover the "secret formula" of trading that anyone can use to consistently generate BIG profits from the market by downloading your FREE copy of David's new Ultimate Stock Trading Systems course.
Both Clint Maher & David Jenyns are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Clint Maher has sinced written about articles on various topics from Internet Marketing, Personal Finance and Finances. Want to find out more? We expose the secrets of the wealthy. Visit our website. Download your free 230 page E-book from The. Clint Maher's top article generates over 3600 views. to your Favourites.
David Jenyns has sinced written about articles on various topics from Forex Guide, Finances and Investments. READ my articles; you'll FIND the most powerful insider trading plans & tips ever put together. Searching for these on your own, is a needle in a haystack (hard to find). I trade everyday & my progressive efforts found the perfect trading card, a set syst. David Jenyns's top article generates over 5400 views. to your Favourites.
Computer Skills For Kids With the right foundation, the skills youll learn from me can be easily implemented, and you will find success in Network Marketing!
