If my account - all of my positions together (not any cash sitting in my account) - are valued at $27k (hypothetical here) on that particular day, does that mean that my next trade I should risk no more than $540 (2%) of that total (27k)? So then on the next trade, I would have the price of a stock, and determine the number of shares I want to buy. The stop loss would be $540 / # of shares below the buying price. So if a stock is trading at $24. And I want to buy 100 shares (is this a random number?). 540 / 100 = $5.40 that I can lose per share. So my stop loss order would be at 24 - 5.40, or $18.90. Correct? Or would I buy more shares, say 175, so my risk would be 540 / 175 = 3.08 per share? Wouldn't this all depend on the cost of the stock? Really in the weeds here with the basic concept in practice. Thanks for your patience if anyone can help me understand this in practice...
I personally don't follow the 2% of account rule you find around the web, it all comes down to personal risk tolerance. I usually look at it on a per trade basis. We're in a volatile market right now so you don't want to loose your long position gains on a solid stock if it goes down 10% one day but up 40% in 2 years. Lets look at it from a perspective when markets are stable: You buy XYZ @ $24 per share x 100 = $2,400 Let's say your personal risk tolerance on this specific trade is 5% below purchase price ---> $24 - 5% = $22.80 Meaning, you're comfortable with loosing $120 & putting in a stop loss order at $22.80 to mitigate your losses.
