My portfolio is say 10 Lakhs rupees
I invest 10% in X with a stop of 2%
Investment in X: Rs 100,000
Stop on this trade(Risk): Rs2,000
Rs2000 is 0.2% of 10L (portfolio size)
In short, I am risking 0.2% of portfolio by investing 1L in stock X
I invest 10% in X with a stop of 2%
Investment in X: Rs 100,000
Stop on this trade(Risk): Rs2,000
Rs2000 is 0.2% of 10L (portfolio size)
In short, I am risking 0.2% of portfolio by investing 1L in stock X
Situation 1
Gap down of 5%
5% is 2.5 times of original stop which means I will lose 2.5 times of 0.2% i.e. 0.5% of my portfolio
Gap down of 5%
5% is 2.5 times of original stop which means I will lose 2.5 times of 0.2% i.e. 0.5% of my portfolio
Situation 2
A severe gap down of 10%
5times more than original risk. I will lose 1% of portfolio (5x0.2%)
A severe gap down of 10%
5times more than original risk. I will lose 1% of portfolio (5x0.2%)
Situation 3
Worst possible gap-down scenario
20%
10 times more than the original risk. I'll lose 2% of my portfolio
Worst possible gap-down scenario
20%
10 times more than the original risk. I'll lose 2% of my portfolio
Even with the worst possible case, I will never lose more than 2% of my equity because I size my positions in such way. Of course you will lose a lot more if you have 50-100% in just 1 stock.
Contd.
Contd.
In my entire career, I have NEVER encountered a 10% gap-down situation, let alone a 20% one. As for 5% gap downs, I can still count them on one hand since they were infrequent.
Contd.
Contd.
How did I manage to avoid?
By not trading stocks that only or mostly move in circuits. If a stock is hitting upper circuit, it will come down faster the same way
&
By trading well-liquid stocks that offer easy exit at every price.
Don't fret over what you can easily control.
By not trading stocks that only or mostly move in circuits. If a stock is hitting upper circuit, it will come down faster the same way
&
By trading well-liquid stocks that offer easy exit at every price.
Don't fret over what you can easily control.
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