Money Management – Without It You’ll Crash and Burn!
Successful traders need to be good at so many things.
They must know when to enter a stock.
They must know when to exit a stock.
They must master their mental game.
Then, why is it that so many traders neglect money management?
Money management is just as important to your trading as knowing when to enter and exit. Some people think it is even more important! A trader without good money management is an accident just waiting to happen.
You might be a great stock picker but at some point your luck will run out. Without good money management one bad trade can blow out a profitable winning streak! No one is exempt from this. A good trader will always take the time to work out the maths behind each trade.
Before you enter a trade you should:
1) Write down your entry price.
2) Write down your stop price.
3) Write down your profit target price.
4) Apply a money management plan!
A money management plan is needed, so if you get stopped out of a trade the loss will not wipe you out!
Successful traders approach trading no differently to a business. Every good business uses a budget. Every good business has profit forecasts. Why should trading be any different? A business like approach must be adopted to stay in the trading business.
Amateurs tend to think of each trade as an isolated event. An amateur might receive a stock tip. The stock recommended is set to soar! The first thing the amateur does is reach for their piggy bank. Without looking inside they have no idea how much they can afford to invest. The amateur will often dump everything they can into that one stock. They are looking for the home run!
Gurus do things differently. For them, each trade is not an isolated event. Before starting to trade they have worked out how much capital they can devote to their trading business. There is no way they would dump their entire portfolio into one “good” stock. Instead they may allocate a percentage of their portfolio to this stock. Every trade they make is considered within the context of their entire trading portfolio.
To survive and prosper in the business of trading you must master the skills of money management. You must do the maths behind each and every trade. Without money management don’t be surprised if you crash and burn!