Money Management Tips Part III – Using Cash, Diversifying & Hedging Risk

Provided By Ultimate Trading Systems

You Must Follow Good Money Management Tips To Succeed

All money management tips are meant to protect your capital and profits from unnecessary risk. But locking in your profits and taking small losses guard individual trades. The money management tips covered in this article offer a wider-ranging protection, and give you more security in markets that are choppy and perhaps unstable.

One of the first money management tips you should consider doing when a market seems unsteady or overbought is to lighten up your positions and go mostly to cash. This is particularly true if you are using margin. Whenever a market is about to turn it’s always safest to have cash. Severe market volatility is unpredictable and difficult to trade in, it’s better to simply stay away from it.

Diversification is also another one of our very important money management tips. Putting all of your money into positions that carry the same types of risk are not good money management tips. Instead, find trades with different risk levels and risk factors so that if one sector experiences a sudden downturn, only a portion of your account will be affected.

There are other money management tips to hedge your risk, and you may want to consider learning about some of these money management tips. For example, if you're playing a stock that you believe will go up but could instead go down, try to find a weaker stock that should generally go in the same direction as the first stock and short the second one. That way, if the primary stock goes down, you'll profit from your short, which is likely to fall faster because it's weaker. If the primary stock doesn't fall, the secondary stock is also not likely to rise as fast for the same reason.

Many common money management tips involve options. Two more examples of money management tips are straddles and strangles. A straddle is an options play where both a call and a put are purchased. The call and put have the same strike price, the same expiration month, and the same underlying stock or index. A strangle is another options play where both a call and a put are purchased. In these money management tips, the call and put have different strike prices (usually both out of the money), but have the same expiration month and the same underlying stock or index. Hedging is a form of insurance, so it will cost you a bit by decreasing the profits you make on a play. But there are times when insurance is well worth the cost.

However, there are traders who routinely fail to use most safe trading and money management tips. These traders should ask themselves why they're engaging in this dangerous and self-defeating behaviour. There is almost always a psychological motivation for something that doesn't otherwise make sense.

Risky behaviour is often a form of escapism or a substitute for something more meaningful in a person's life. If you seem to resist using proper money management tips or often "forget" to make a plan or set stops, take a look at your own motivations. Better to figure it out now, deal with it, and prosper than to lose all your money because you didn't know what you were really trying to do. Removing any barriers that exist to your practise of money management tips will enable you to reap all the benefits that trading has to offer.
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