Money Management for Stocks?

Discussion in 'Trading' started by pirx, Feb 15, 2008.

  1. pirx



    I'd just like to ask, which type of money management do you people use for stock investing. Is it A) a fixed percentage of your equity, or is it B) you divide your money into x equal units and then risk a percentage of that?

    Example A:
    2% risk per investment with a 7% stop-loss:
    Trade 1: Cash: $10.000; Risk: 2%; Risk ($): 200; Stop-Loss: 7%; Position Size: $2857;
    Trade 2: Cash: $7.143; Risk: 2%; Risk ($): 142; Stop-Loss: 7%; Position Size: $2.040;
    Trade 3: Cash: $5.103; Risk: 2%; Risk ($): 102; Stop:Loss: 7%; Position Size: $1.458;

    Example B:
    $10.000 : 4 units = $2.500/investment. A 7% from that is $175 or 1,75% from $10.000. If I decide to invest all 4 "units" and risk 7% on every investment, my total portfolio risk would be 7%.

    I don't understand, why is Example A so widely used. If for example my first investment ($2.857) goes bad, I loose only 7%. But if my third investment turns out to be a winner, my basis of $1.458 is much smaller, than that from my first investment. Why wouldn't be better just to divide my cash into equal units (Example B) and to have the same exposure on all my investments?

    Please correct me if I'm calculating this all wrong, but the 2% per investment doesn't make any sense to me.