Remember the LORD for it is he who gives you the ability to produce wealth and so confirms his covenant... Deut. 8:18

Wednesday, November 19, 2008

Risk Control & Size Positioning

5 years low since 2003. DJIA down 457 (5%) to 7997 with S&P500 down 52(6%) to 806 points: 3390 losers and 303 gainers were registered.
Auto industryin trouble, consumer spending down, energy down 9%.
Oil at 22 months low.

For reader interested in position sizing:
Suppose you have RM100,ooo capital and you wants to buy/sell stock shares but is willing to lose only up to RM10,000. Then what is the size of your position in the stock market given a risk control loss?

1. Set up a cut loss line. If your risk loss is 20% tolerance, that means you can take a position up to RM50,000. The Rm50,000 is the size of your stock investment/trading. In any event of a sharp value decline of your stock holding by 20%, you lose only RM10,000.
But if your tolerance is 10%, then you can actually position the size of your whole capital of RM100,000 to buy shares. In any event of loss, it is restricted to RM10,000.

So say you bought IOI Corp share at RM4 x 25000 shares and unfortunately the market declines. Share now goes down in price. Your cut loss is 10% and you should sell when price drops to RM3.60 thus preserving your capital: 25ooo shares x RM3.60 = RM90,000.

2. Assuming you quit the stock market and place your reduced capital of RM90,000 with a bank earning deposit interest of 3.75%, it will take 3 years for your placement to revert back to RM100,000.

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