One of the most overlooked topics in trading, Money Management has the power to make or break you as a trader. It would be fair to say that you could be the best trader on the planet, but if your money management strategies are deficient, you will probably go broke very quickly. Money Management is an essential element of trading discipline that is practiced by all professional traders.
So what is Money Management? Money Management is essential to preserve your trading capital and is simply a set of rules that governs how much money you have at risk. Ask yourself the following questions to determine whether or not your Money Management plan is in good working order:
1. Do you know how much you are risking on each trade? This depends, to some extent, on the time period over which you trade. A good rule of thumb for day traders is to risk a maximum of 2% of your trading capital on each trade. Remember, you will not win every time and you need to be able to withstand a losing run and stay in the game. Not staking too much on one trade is […]
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Ok, so no trader truly enjoys taking a losing trade. But if you want to succeed in this business of Day Trading, learning to love your losers (or at least accepting them) is one of the most important lessons you can learn. Psychologically, human beings are not well designed for trading financial markets. We hate losing, we hate being wrong, and we get buffeted about by those twin emotions - fear and greed. This leads us into all sorts of self destructive habits. Moving stop losses further out - just to give the trade time to turn round. Or grabbing a profit as soon as it appears - just in case we have to give it back.
The simple fact is that most successful traders lose as many, more likely more, trades as they win. What separates them from the rest is their ability to cut a losing position and run a winner for as long as possible. The arithmetic is simple. If your average winner is twice the size of your average loser, then you can be wrong on 50% of your trades and still make very good money.
In fact, […]
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Anyone who watches the stock market has seen (almost on a daily basis) Stocks that rise a significant and enticing amount. You can’t help but wonder “How can I get in on this? - I would be set for the month” (or week depending on what you expect from trading). Before I continue I must explain that this concept is Day Trading in its purest and riskiest form. However, it is terribly tempting to contemplate, so lets explore the numbers to see if we can find some answers to this question.
To start we need a more specific question - lets entertain the example question: If a stock goes up say 3% one day and then 5% the next, what does it do the third day?
(This question was not chosen at random, various attempts at this calculation have shown that these values over a 2-day range provide the most, and therefore steadiest, data. I also think it is the most intuitively reasonable question for exploring this type of data).
The answer is: 87% (972 out of 1117) of occurrences had an average gain of 7.5% and a median of 9.5%
(6 months of data up to Feb. 22, 2008, 4493 Stocks reviewed, next […]
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