Money Management Tip

Capital management in Investment...

A Story For You:
I know a trader who invested $15,000 in futures index, told me each time the index move in his favor, he would pyramid his position and add on more into the index futures. His portfolio keep growing that he sacked his boss and traded full time. I met him one day and ask, “Why don’t you keep some of those hard earn profit, had a cigar and enjoy yourself?” He replied that it’s not going to be long before I can hit 3 million dollars and retire with my dream sail boat.

I met another trader some time ago, who was very successful with his swing trading strategy that he quit his marketing profession to trade full time.

When I asked about his exit and position target, he replies, “I just wait till they move higher.” When asked,” what if they go against you?” his replied was, “I’ll put more bet on it.”

I remember a few years ago, there was this talkative woman in CNBC showing everyone how to management their trade capital. Basically she believe the market is always up and whenever the market drawback it is a good opportunity to stack up the bet.

Back to the present time; number one trader lost all of his saving and back to his old job working 7 days a week. The second one seems like have to apply for a job soon. Regarding the CNBC woman, she actually disappeared in the air after a few month in the show and I never seen her again in TV. This is the reality of trading and the money management tip here to avoid this to happen to you is to employ a good simple capital management system and stick to it.

Why capital Management is so important in trading?

If you were winning every trade and going to win and win again...How good is that!... Why bother? The fact is that in the game of trading, being wrong and lose money is part of the business, with all these losses and wins happening, we are stacking big profit and minus small losses, hopefully at the end of the year we are ahead of our bank account.

Managing capital is more or less function as an "insurance" to protect your capital. You may have already heard from many professional traders that they are always doing one thing, i.e. to protect their capital.

Money management tip - It is not a fix management strategy with $ or %, it changes according to the volatility of the underlying market. The more volatile the market is the smaller % of the capital you can risk.

Money Management tip - How do I manage my trade?

I only risk 1% to 2% of my capital, with slippage sometime I end up losing up to 7%. Say, if I have $100,000 as my capital, for every trade I'll only risk the most 2% of my capital i.e. $2000. For instance, if I saw a long set up for IBM trading at $90 and my stop level is $88, I am risking $2 per share, therefore the size of this trade is buy 1000 IBM at $90, stop at $88.

Risk Management:
Trading only 1 contract at a time will cause you to FAIL !!!
Make sure you are well capitalized. This is not a game for those who are not short of capital.
The only way to win at futures trading is for you to be larger (have more positions) when you are right and less positions when you are wrong.

This is the key to trading
Maintaining the same number of contracts for each trade will cause you to FAIL.
Varying contract size is the MOST important thing you must do, if you want to be successful."

Fernando Diaz concluded:
"Successful traders have a larger edge and better capital management than unsuccessful traders. Unlike popular belief however, this study shows that the smaller edge of successful traders is not the cause of their failure. Traders' failures can be explained almost exclusively by their poor money management practices."

Money management tip from www.turtletrader.com/money - Money-management is like sex: Everyone does it, one way or another, but not many like to talk about it and some do it better than others. But there's a big difference: Sex sites on the Web proliferate, while sites devoted to the art and science of capital management are somewhat difficult to find ... For many traders, it is the ugly stepchild of the trading family. But you can ill afford to neglect this aspect of your trading plan. A breakdown of the fundamental capital management concepts you should understand, and tools and ideas on how to implement them. .. When any trader makes a decision to buy or sell (short), they must also decide at that time how many shares or contracts to buy or sell — the order form on every brokerage page has a blank spot where the size of the order is specified. The essence of risk management is making a logical decision about how much to buy or sell when you fill in this blank....Gibbons Burke

Money management tip by Gibbons Burke - Money management tip - Manage Your Money in PDF files.

>> Capital Management Tip - quotes from professional traders:

• "I'm more concerned about controlling the downside. Learn to take the losses. The most important thing about making money is not to let your losses get out of hand."... Marty Schwartz.
• "Diversify your investments"... John Templeton.
• "Diversification is a hedge for ignorance"... William O'Neil.
• "I'm always thinking about losing money as opposed to making money. Don't focus on making money, focus on protecting what you have"... Paul Tudor Jones.
• "The best traders have no ego. You have to swallow your pride and get out of the losses."... Tom Baldwin
• "Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical."... Larry Hite.
• "If you have an approach that makes money, then capital management can make the difference between success and failure... I try to be conservative in my risk management. I want to make sure I'll be around to play tomorrow. Risk control is essential."... Monroe Trout.

Money management is the most significant part of any trading system. It determines how much to risk on each individual trade, in forex trading, experienced analysis, disciplined money management techniques and painstaking research with money management rules from performance history can change a loser to a winner.

Choose a CLEAR, TREND following indicator. One that an 8 year old could tell you whether it is long or short. ONLY trend following indicators will work. If you have to think for more than 1 second whether it is long or short, it isn't clear enough. Stick to 1 indicator in 1 time frame. NEVER pay any money for other people's systems. They will NOT work....

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