Today I'll be talking about money management, which is the most important aspect of trading as far as I see it.
The most simple act in the world of money management is simply to put a stop loss command, which means you will sell the financial instrument you are holding (for instance A stock) if it will fall 4% for example. Explanation - That if bought a stock for 100$, and decided that you are not willing to lose more than 4%, you should either wait for the stock to fall to 96$ and then sell it, or put a command into your broker’s account telling him you want to have a stop loss 4% below purchase price.
I usually don’t risk more than 2% of my money on any single position I take, and even that figure is too big and should be minimized, that is used to protect me from having spikes in my equity curve, thus using money management system that limit your account from market crashes like 2008 one. Could very much save your entire account instead of just let it free fall. Image having 100,000$ under management, the stock you picked it priced 50$, and your target price is 58, you want to protect it with a stop loss at 48$ (4% below), how do you choose how much quantity of the stock to buy? Should you use your entire buying power and put 100,000$ at risk? That would be much of a mistake, looking at it in a money management perspective, since 2% of 100,000$ is 2000$, and by putting your entire account exposed to 4% downfall of the stock from 50$ to 48$ you could lose 4000$ on that deal alone if it would go wrong, which means double the amount you wanted, so good money management system protects you from doing such a mistakes, telling you that the maximum amount of money you could allow that position is 50,000$.
Another important money management rule is to cut losing eras short, we as traders tend to be a bit of gamblers in a losing streaks, thus if we start losing, we keep trying to put another trade, get that position that our system is telling them that will not likely to be a profitable one, in order to get out of the losing streak, but as the old saying say, “when you find yourself in a hole, stop digging”. My advice is to stop trading by the end of the month if you see that you have lost 8% of you capital in that month alone, it’s obvious that either the environment that you are trading have changed, your trades are going wrong, or maybe you start buying the no-good positions that normally you’d never take.
Please tell me if you like it, and which other subjects do you want me to cover.
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