Dealing With Risk: Have You Been Taking Way Too Many Risks With Your Stock Portfolio?

Despite the fact that the majority of investment web sites might have you believe you should really put all of your money in latest stock pick, we view trading with a different perspective: capital preservation. Not each and every stock you invest in is heading straight towards the moon. The key to keeping in the investing game is to maintain your money by making sure losses do not take you out of the game.

If you are thinking about trading for a living, controlling your risk is the most important driver for you to achieve your goal.

At 1source4stocks.com, we're huge followers in position sizing, as popularized by Van Tharp. As part of his book Trade Your Way to Financial Freedom, Tharp proves how the most significant influence in your overall stock portfolio results is the proper use of position sizing. The good news is, controlling risk has never been easier.

Precisely how many stock shares need to you acquire?

So that you can manage risk correctly, you've got need to determine the number of shares you will obtain depending on how much risk you might be ready to take prior to you hit the sell button. Lets appear at two situations:

1. Determine the sum of the valuation of your stock portfolio. For demonstration purposes, lets say its $50 000. Many professional investors may risk 1% or perhaps less for each trade. For a smaller stock portfolio, if you happen to be willing to look at a larger risk, 2% might end up being additional best suited. Anything higher than that and you'll be betting, certainly not trading. With your $50 000, along with a 1% risk restriction, you are willing to set risk around $500. If 2% had been your inclination, you'd be willing to forfeit $1000 for each trade.

2. Let us just imagine you desire to acquire shares in ABC, and its trading at $10 / share.

3. You've checked out your charts, it would seem there is support at $9, so that sets our risk at $1 for each share

4. Divide your limit of $500 by $1 in order to determine the number of shares you are able to buy. In this case, you could buy 500 shares of ABC @ $10 for each share. In the event you had been willing to risk 2% of your stock portfolio per trade, you'd invest in 1000 shares of ABC.

It's that simple!

Lets appear at one more example of this:

1. You make a decision to danger no more than 1% for each trade of the $50 000 stock portfolio.

2. You might have your eyes set on a stock hitting a brand new high at $3.50.

3. You make a decision to employ a 10% trailing stop, which in turn sets the preliminary danger at $.35 for each share.

4. Divide 500 by .35 to obtain 1428.57 shares. We suggest rounding to 1400 shares.

The key is to make sure when the investment moves against you, you can sell without substantial damage in your stock portfolio. When the stock begins to move up, you will have sufficient shares to rack up the gains with. Don't forget, the key to this is not hitting the home run at every single at bat - its not striking out at every single at bat.

Sadly, risk management is not among the basics of stock market investing which are made clear any time investors open an investing account. It ought to be because it is the most significant aspect in determining failure or success.

Smart investors recognize this - and after this so do you.