Money Management Advice Part I - Lock In Profits
By Ultimate Trading
Excellent Money Management Advice Is Difficult To Come By
The purpose of money management advice is to protect your capital,
and your profits. The single best way to protect your profits is to
lock them in. Really, you can either lock them in, or you can lose
them. I cant say it any more simply than that.
Until you have exited a trade, any profits you have on that trade
are virtual profits, and can still be lost. You might be wondering
how you could loose the profits you already have. You followed the
management advice. Generally, a trader looses his profits when
he stays in a position too long, and the stock begins to move
against him. Then instead of exiting the stock while there is still
some profit left, the trader waits for the stock to return to its
previous level so he can make his profits back. But there is no law
that says the stock has to go back up.
My money management advice for this problem is to use price targets.
But since price targets are only guidelines, consider selling half
your shares at a more conservative target than the one you actually
think the stock has a good chance of reaching. That way, you lock in
a good chunk of profits, and whatever happens after that there's no
way your profits can disappear.
Sometimes, if you think the stock could travel a long way, some good
money management advice you might want to follow is to plan several
levels where youll take profits. Consider selling half your
position, then half of what's left, then half of what's left of
that. You can set your selling points near the psychological
barriers you expect the stock to encounter. These points can often
be round numbers like 10, 20, and 50, or percentage barriers like a
25% gain for the day. More money management advice to lock in
profits is to use trailing stops. By continuously raising these
stops as the stock price moves up, youll lock in the profits youve
made below the stops. This will also protect the entire position in
case of a sudden downturn.
Always have your exit strategy in place before you make a trade,
whether it is trailing stops or selling points is some of the best
money management advice you will hear. Remember, your exit strategy
should be part of your overall money management plan. You should
have every contingency planned for to ensure there is no room for an
emotional response to a trade. Its easy to listen to bad money
management advice when youre dealing with unexpected market
movements and dont have a plan in place.
Let's look at a shorting example to see how this money management
advice should work. Suppose you short a position at $38 after it
runs up 100% in a day on modest news. You calculate it could lose
around half of its new gain in a day or two. You decide that you'll
take half your profits when it gets down to about $35, another half
when it reaches $32 and the rest when it reaches $29. To manage your
risk, you also place a stop buy-to-cover order at $40.21 and wait.
The position moves as your money management advice predicted, and
within an hour is approaching $35. You adjust your trailing stop to
cover half your position at a lower price and place a limit
buy-to-cover order on the other half at $35.10, which executes. Late
in the day, the position takes a dip down to$32.70, then $32.30.
Knowing that a lot of people put in orders right at round numbers,
you try to get in a little ahead of them and buy to cover half of
the shares you have left at $32.10. You then reset your stop for a
lower price on the position that is left but let it expire at the
end of the day because you think it might temporarily gap up in the
morning as the last gasp of its big run. The position closes at
The next morning, it gaps up as you thought it might, reaching
$33.40. It then starts to fall, slowly making its way toward your
expected final selling point of just above $29. You reset your
trailing stop at $33.60, as your money management advice told you to
do. To your surprise, though, it picks up steam later in the morning
and runs up to $33.90, triggering the stop on your remaining shares.
It seems to have the legs to run for another day.
This isnt important, since you took profits at a much better price
yesterday and no one can take them away from you. On top of that,
you're now free to short the position again once it reaches the top
of its second-day run. If youd ignored this money management
advice, you'd have no profits and would have to wait for the
position to go down in order to see them - plus you'd run the risk
of it rising higher than the point where you shorted it.
As you can see with this example, good money management advice
ensures that you keep all your profits, and all your capital, safe.
Without them, you run the risk of losing everything. Always have
advice before you trade and follow your money management advice
consistently. Then you will consistently be a successful trader.
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Money Management Advice