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2% Thumb Rule of Stock Market to Make Money

Posted By On 4/14/2009 11:43:00 AM Under

1. Preserving capital and cutting down losses is of paramount importance to ensure success as a trader or a long term investor.

2. As a thumb rule make sure that one is not risking more than 2% of the total trading capital on any one trade. This will ensure that even if one goes wrong one has still preserved capital to recoup the lossess and make progress as a successful day trader.

3. If one is risking only 2% of capital on a trade than one ca take unbiased decision for stock as one ca afford to become indifferent to an individual trade. Keeping your risk small and constant is absolutely critical.

4. The idea here is that no one trade is going to significantly affect you if it results in a loss. One is comfortable as an error or a wrong judgment is not going to lead to an individual selling th home or going broke.

5. The way to define risk for purposes of the 2% rule is by determining the loss one will incur if the stock price goes down. For example, if one owns 1000 shares of ABC at Rs.100 with a Rs.2 stop loss order in place, an individual risk is: Rs.2 * 1000 = Rs.2,000. So long as one has capital amounting to at least Rs.100,000 on hand, one would not be considered to be in breach of this "rule".

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