Teeka Tiwari

How Much Do You Really Have at Risk?

    Tweet This

Free Trading Guides

Everybody has a different level of expectations and commitment when it comes to managing their own money. If you are a real student of the game, then what I'm about to share with you will absolutely change the way you quantify risk throughout your investment portfolios.

Investors are becoming much more sophisticated than they had been in the past, and we're seeing more and more non-professional traders bringing real "best practices" risk management to their trading.

One of the most important best practices (and the one I harp on the most) is governing your position size by your stop-loss point. That is, selecting a maximum amount of money (typically based upon a percentage of total portfolio value) you are willing to lose on a single trade, should your stops get hit.

Most hedge funds won't risk more than 1% to 2% of their equity on a trade. This means that, if their stop gets hit, they only lose 1%-2% of their portfolio value. It does not mean that they only invest 2% of their portfolio value at a time. (Learn more about this strategy.)

This method of position sizing is based on only risking a set percentage of your total account value. What I want to do today is share with you a big pitfall to avoid when using this approach.

What's Your Portfolio Really Worth?

When new investors learn of the position sizing technique, they immediately set about basing their percentage of risk against their total account market value.

If your total account is just cash or cash equivalents, then that's fine. If it's not, meaning that you're basing your equity on the market value of the stocks and commodities that you own, that's a mistake, and I'll explain why.