Position size. Confused...

Hi All,
please help me to figure out one thing...

In many topics related to risk management & position sizing they say "assume risk per trade is 1% of your account".

Is that 1% of everything factored in, including margin? So, if calculated number of shares is 20, and my margin is 4:1, I, effectively, have to reduce number of shares by 4, to 5, to meet that "1% per trade" rule?

Thank you.

 

I'm a bit confused by your explanation but here is how I would answer the question.

Assume you have 100k in your account. The margin doesn't really matter for how much money you are risking. If you can purchase 400k worth of stocks, taking a risk of 1% on your account means you are risking 1k of cash, regardless of using margin or not.

So since you know that you are going to risk at most 1k, then the next thing to figure out is how much of a move this means to you. If the share is $100 and you go long, and you buy 1000 shares, then if the price drops down to $99 per share, you have lost your 1k.

Now if you see that your stop on the stock is based on some support level that you peg to be at $98, then this means you have to allow price to drop $2 per share, and since you still are only looking to risk 1k, then this means that you can only purchase 500 shares, which will now only cost you 50k as opposed to 100k, but you are giving it more room so to speak.

Now if you were to say use the 4:1 margin as you outline, then you can be buying 400k worth of shares, and so this means that you are able to buy 4,000 shares. But since you are still only risking 1% of your cash in your account, a drop of only 25 cents per share, times 4,000 shares, would bring you to your limit of $1,000 that you are willing to risk. Your margin effectively means that you can't give the trade as much room given your 1% risk per trade rule.

Now that I read over your question again, I do think you said the same thing.

 

not exactly sure what op was asking, but you explained the situation very well

 

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Sounds like you have that part figured correctly, 1% of everything;
I realized early the markets are NOT random. I did far worse than random @ first.Wisdom is profitable to direct