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Risk Management in Stock Market Explained with Example

Posted By On 1/16/2009 10:42:00 PM Under

1. One has to make money from stock market and for that risk manahgement is very important which one can call as defining the risk per trade. One should be ready to take that much loss only which one can afford to bear. as a trader one should be ready to accept market volatility as it can lead to a stock hitting the stop loss. Analysts trading tips can go wrong due to the prevailing market sentiments. Thus defining the risk management is important as in that scenario one can restrict the loss. The same is explained with an example so that one is clear f the action to be undertaken to avoid being caught offguard in the stock market. The example is illustrated below:
If a trader is willing to loose per trade Rs 2000/-. Then the recommendation is as follows:
Buy Xyz stock at Rs 100 Stop loss Rs 96
Difference of buy price and stop loss = Rs 4/-
Amount Willing to Risk or Amount willing to loose per trade= Rs 2000/-
How much volumes to trade= Amount willing to loose divided by the Difference of buy price and stop loss= 1000/ 4= 500. The volume that a trader can trade in the recommendation is 500 shares.
In this case if the recommendation fails on account of stop loss violation the loss is restricted to Rs 2000.

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