It is very important to decide how many shares we can trade today.  Generally we see the profit on any trade, we think if I buy 1,000 shares the profit as per the expectation is 2 rupees per share and my profit in this trading will be 2,000 rupees.  Great… if the trade goes as per expectation.  But, unexpectedly, if the share price turns against our wish and it is hitting the stop loss then we will end up in loss. This is the reason and is very much important to decide the quantity to be traded.  While we calculate the profit, at the same time we have to think if the trade goes in the opposite direction, how much we will lose in today’s trade.

Hence it is very much important to decide how much money we are ready to lose today.  It might be surprise to the readers that we are always trading to make profit, not to lose and why should we think of loss? This is not a pessimistic approach but preserving our capital is the first priority. The fact is that not all trades will be profitable, over the period of time our net position must be profitable which means the gains made by many trades must be more than the losing trades. For example, if a trader has one lakh rupees in his balance and he decides that can lose 2,000 rupees maximum for the particular day of trade, hence he must decide the quantity to be bought. Before deciding the quantity, it is better to split the loss in to two or three trades.  The reason of splitting the loss will help enter in to more than one trade and if one trade goes negative the other might save the loss and the net will be profitable or at least reduce the loss.  Hence if we decide to go for two trades, we can say each trade can bear a loss of Rs.1,000.  Accordingly, if the stop loss is Rs.2 in one trade, we can enter in to trade with 500 shares.  If the stop loss is Rs.4 in the another trade, we can enter in to trade with 250 shares.  If both the trades are winning… its great, if both trades are losing, our maximum loss will be only Rs.2,000 as we decided earlier.  If one is a winning trade and another one is loss, then we may break even or even exit  the trades with profit.

As we are all aware, market might turn its direction at any time based on news – both local and international, results, publication of any data and many other information which might make our trade to turn the opposite direction.  Hence give importance to stop loss before estimating the profit and decide the quantity to be traded accordingly.