Money Management strategy
Please note that while those money management ideas have been long tested and applied, we could not use them in our posted results due to their complex nature, but we are using them in our real life trading accounts.
In other words, our performance results have not been taken into account this Money Management strategy the fullest extent. The information contained within these strategies are conservative stock investing pointers and related information.
Even with the best tools and stock market strategies, learning to be a profitable trader takes money and time. Many traders make the mistake of thinking that a magic filter or method will allow them to make money without any effort. Greed, fear and the need to be right pave the road to stock market failure. Learn what stock market trading strategies and money portfolio management strategies work best for your acceptable risk level.
· One of the keys of a solid stock investing system is to watch your stocks during the first 15-30 minutes after the market opens. The ones that hold the gain (or loss if your shorting) for the first 15-30 minutes and are still under the 3% increase are considered good candidates.
- Never trade more than 10% of your total stock trading account in one trade. For example if your trading account is $25,000,your maximum amount for one stock trading should not be greater that $2500!
- Use mental stop losses of 10%, and hard stop losses of 25% for stocks over $10. Use more for stocks less than $10: 20% and 35%.
Mental stop losses means that you take a look at the end of the day at your portfolio and see if any of the stocks are down more than 10% since you purchased them. In this case you watch that stock carefully, read the corporate news, and see if any significant changes are making your stock to lose value. Hard stop losses are actual stop orders placed with your brokerages, and are your safety net for any unpleasant surprises the market might offer us. (As an example, see the 9/11 disaster)
· Use profits taken at 40% or more. When you stock reaches 40% profit you should take some profits, leaving the rest to follow its course. In this way you can secure some of your initial investing.
When you have more than 15% profit, move your stop loss to the break-even point, and continue to do it so until you exit the position. We call this trailing stop. You should consider initiating such strategy after the initial 15% gain.
One aspect of money management is the understanding of the simple mathematics of gain/loss: If you have a trading capital of $10,000 and you lose 50% it is not enough to gain 50% to break even. After a loss of 50% you now have $5,000. To break even you need to make 100% with your leftover 5,000 to reach your original capital of 10,000 again.. You see the importance of protecting against losses.
Use margin stock trading wisely, or you might lose more than your initial investment. Margins are a great way of multiplying your initial stock market investment. But, if not followed closely and done properly, this type of stock investing strategy can result in big losses fast. A famous trader said it all: "Big positions mean big problems".
Start out small and build up your confidence and your trading account slowly but surely. Don't try to become rich quickly. Consistency is the name of the game. If you have consistent trade returns after a long time period (more than a year) and including riding through down periods in the stock market, you can slowly increase your exposure. Our method has been proved to work in different markets, but it's YOUR MIND SET that has to be trained.
Diversification: If you have 20 stocks and one of your selections crashes unexpectedly and you have a total loss in that stock ( it is very rare but can happen) you have only lost 5% of your trading capital. Not too bad. You will survive and you can continue your trading without much damage. If you have a good strategy otherwise your profits will more than take of this eventuality. If you hold only 2 stocks you have now lost 50% of your trading capital. One more time and you are out, totally.
Risk control: If you are a beginner we would suggest you start with a paper trading system. Keep a solid record of all your stock trading on paper and record all emotions and mistakes you are going through. After a month or so start small with real money. Yes, small! Remember: Big positions mean big problems. We have done all the hard work for you, now is your turn!
Use LIMIT orders to enter and exit a position. Market orders can guarantee you a fill, but not the price.
A LIMIT order slightly BELOW the previous close would get filled 95% of the time. Why? Because a stocks usually does a retracement during the first part of the day.
If you cannot watch the market throughout day -- and many of us cannot -- then a stock market order would do the job. Keep in mind that the price you might pay when your order executed might be much higher or lower than what you expected.
We strongly encourage the use of limit orders, as sometimes the spread between bid and ask is big.
You have multiple choices for existing a position when it comes to a stock investing strategy or stock trading system: 40% profit taken, 15% trail stop, or just wait for the next signal in the market. It all depends on your risk/reward tolerance associated with your investment strategy.Some investors prefer a smaller gain and smaller draw-downs; other ones want to risk more for a better reward -- it's all your personal choice and part of your own investment strategy and portfolio management.
In some of our performance data we used 20% stop loss and 40% profit taken, and if none of those conditions were met during the lifespan of a trend we would exit when another signal would appear on the market.
The biggest mistake investors make when using a trading system is to follow it blindly. The system works the way it is, but there are many variables that you have to take into account:
- broker's commission fees
- fill price
- liquidity of the stocks traded (we usually trade stocks with an average greater then 100,000 shares/day)
- intra-day drawdowns
- trading account size: some investors don't have enough capital to buy all the stocks proposed, therefore they might "cherry picka" some of them and this can lead to huge losses for your stock trading portfolio.
- trader's psychology: the humans are all different,and the investors are the same kind:). One investor might be very comfortable with a gain of 10%/trade , but other won't take any profit under 50%.
Please note the previously mentioned suggestion might not work with all trading strategies: i.e. If you are following Long Term strategy, you should be more liberal with your stops and profits.
Compounding your gains: "the phenomenon of reinvested earnings generating more earnings"
Compounding your gains is a very powerful concept that you should fully utilize: that's how all the famous traders made their fortune.
Then basics of compounding are quite simple: you start, let's say, with a portfolio of 5 stocks, each worth $1,000. After a while you sell a stock for a gain of 35%,so the available cash to be invested now is $1,350(or even more if you use margin), which you fully invest into another stock..and so on.
Over time, your portfolio won't be composed from stocks equally weighted, as you'll use all your investment power to buy new stocks. This concept has been applied as well in our performance data: we used compounded gains for up to $10k/stock(starting with $1k/stock).