Money Management Advice Part I - Lock In Profits

Provided By Ultimate Trading Systems

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 can’t 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 wrong money 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 it’s 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 you’ll 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, you’ll lock in the profits you’ve 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. It’s easy to listen to bad money management advice when you’re dealing with unexpected market movements and don’t 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 $32.60.

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 isn’t 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 you’d 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 money management advice before you trade and follow your money management advice consistently. Then you will consistently be a successful trader.

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