Trading Money Management Skills
Can Make or Break Your Stock Portfolio
By Trading Secrets
Trading money management is all about setting rules and guidelines that
keep your risk at a level that youre comfortable with.
Now, these rules and guidelines for trading money management are determined
before you even enter the stock, that way you dont get emotionally involved
with the stock and make poor trading decisions. You want to make sure
with good trading money management, that you can maximize your profit
on a winning trade and minimize your losses on a losing trade. With superior
trading money management, youre able to adhere to the two cardinal rules
of trading, and they are to let your profit runs and cut your losses short.
That leads to why trading money management is so important. You see, if
you dont have these rules in place, these rules predefined, what will
end up happening and this is what happens to most traders and why most
traders fail when they come to the market, they being to rely on their
emotions to make their trading decisions.
With good trading money management, you dont need to worry about your
emotions. In fact, your system is set on autopilot. So, you dont need
to think on the fly and decide. Should I hold on to this stock? Or shouldnt
I hold on to this stock?
Its that type of indecision that most people are confronted with if they
dont have good trading money management in place, and the result is they
end up holding on to losing stocks. Stocks that are losing the money.
And, just keep in mind that all big losses once began as small losses.
Moreover, if you let a losing trade turn into a big loss, thats going
to have a detrimental affect on your trading capital, and once you take
a couple of big losses, its much more difficult to trade and to gain
back the money which youve lost.
More importantly, if youve wiped your trading float out, like many traders
do when they first get started, you cannot continue to trade.
Despite the proven fact that trading money management is so important,
its funny, many of my clients when they initially come to me, they focus
the majority of their time looking for the Holy Grail by focusing on entry.
Its like they want to find the perfect indicator.
That indicator is going to be the silver bullet for them that slides the
market. Not only is it going to get them right at the bottom of the trend,
but its going to get them right out at the exact top of the trend. That
way, theyll make the most money, and best of all, this indicator apparently
Unfortunately, even though I dont like to disappoint my clients, I have
to let them know two things. Firstly, there is no Holy Grail. There is
no perfect indicator for acceptable trading money management.
Secondly, I have to let them know even if you were to find that perfect
indicator for trading money management that would get you in at the bottom
and get you out at the very top, even if you did find that, its not when
you buy the stock or when you sell the stock that determines how much
money youre going to make. Its how much you actually put into the trade
Lets take an example, lets say that I had a system and my system gave
me a buy for a particular stock, lets call it XYZ, and it gave me a buy
at one dollar. I progress through the trade and I exited at two dollars.
Now, if I bought at a dollar, and then sold it two dollars, I made one
dollar, or 100 percent profit.
What determines how much money I actually make on this particular trade?
Sure, Ive made one dollar per share, however, it depends on how much
money I actually put into the stock thats going to determine how much
I actually make, and that goes for losing stocks as well.
If I had a losing stock, its not when I actually sold that determines
how much I lose. What determines how much I lose is how much I put into
that stock, and thats why trading money management is so important. Theres
a great book that really illustrates the importance of trading money management.
Its actually called .Trade Your Way to Financial Freedom,. and if you
havent read it, I recommend you do. The authors called, Dr Van Tharp,
and hes a psychologist who conducted research on the most successful
traders. He wanted to find out what made them so successful.
Through his extensive research, he broke down the keys to success into
three major components. He called them system, trading money management,
and psychology. He said the system makes up only ten percent of the successful
trader, ten percent, and by system, hes referring to the entry and exit
conditions. Hes referring to what most people spend most of their time
on, and he said thats the least important component of trading.
Next, he said trading money management makes up 30 percent of a successful
trader. Trading money management is simply the definition I touched on
before, which is rules and guidelines that set out your risk in the market.
The final component is psychology, and he said that makes up the remaining
60 percent of a successful trader. Now, psychology may sound a little
bit airy fairy, however the reason he said that psychologys the major
component, which will determine whether or not youre successful in the
market, is because if you had both perfect system and money management
in place, you would only be successful if you could follow that system.
You see, I could give you a perfect system, and I can give you perfect
trading money management, but really it comes down to your discipline
to be able to follow that system, and this is going to determine whether
or not you make money in the market.
You see, most people fall down when they come to trading money management
because they do not approach the market in a systematic fashion, and
thats where a trading
money management plan comes into place, and thats why you need
to stick to trading plan. I know Ive ranted on a little bit about
how important money management is, but its vital that you spend the
majority of your time constructing good trading money management rules
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