How much capital should be allocated ?

[cofioqhz43]

Hello friends and seniors..!

I have a query regarding capital allocation.

For example if i have 50,000 rs , ideally how much capital should i allocate to one stock ?

I read somewhere that one should only allocate 5% to one stock, need inputs on this from others.

Also, i'm confused with the phrase" one should not risk more than 2% capital on one trade"

Does that mean i should allocate 2% of 50,000 which comes to 1000 , or does that mean after i allocate a sum on a stock ( say 5% of 50,000) my loss should not exceed 2% which comes to 1000rs

Please guide.

[crwlglbj63]

2% of your equity means your stop loss limit for that trade is = Rs 1000 and not the position value of Rs 1000. If your stop loss is 10 % away, then your position value will be 50000 * 0.02 = 1000; 1000 / 0.1 = 10000. Now how to allocate to one security? It should depend on what your stop loss amount is. General guideline is to not let your account drawdown exceed 25% combined together. But, you should define your own comfort zone. If a 10 % drawdown would make you sweat, then your stops should be put accordingly. Suppose you're having 3 positions with a max drawdown permissible of 10%. Then divide 5000 into stop losses of each security. Google for position sizing calculators. You'll find many freely available.

[CyRoca]

Thanks sir..! The second method seems very safe to follow.

Calculating maximum drawdown and then putting stop loss accordingly http://www.traderji.com/images/smilies/smile.gif

[Danielpa]

Are you talking about the book "Trade your way to Financial Freedom"

[Dammirwesk]

No, not that. The Definitive Guide to Position Sizing. He details out how to test your system and based on that how to position size and various position sizing methods and their benefits/pitfalls.