Achieve Your Trading Goals with Smart Money Management - dummies

Achieve Your Trading Goals with Smart Money Management

By Joe Duarte

Successful traders share a common trait: They all successfully manage their money. The critical points of successful money management may be difficult to implement, but they’re easy to identify. They include

  • Planning your trades carefully by identifying entry and exit points
  • Minimizing losses by ruthlessly adhering to your stop‐loss points
  • Protecting your profits by setting trailing stops on your trades and adjusting them over time to lock in gains
  • Being objective about your positions and quickly exiting your trades when the trend ends

When using technical analysis to make your trades, you may not always get the lowest entry price or the highest exit price. Most of the time, you’ll end up leaving something on the table. Perfect timing is simply impossible. Instead, the idea is to identify when a trend has begun, enter the position, and ride the trend until it ends.

The secret to profitable trading is disciplined money management, and it all starts with trade planning. The key to success is to develop a plan for your trades and stick to that plan, even if it goes against what your gut tells you. Once you’re an experienced trader with years of profitable investing under your belt, your gut can become a useful tool. Until then, stick to your trading plan, watch the charts, and follow the data. The more objective you can be about your trades, the better.

Before entering any trade, you need to set an entry point, the price at which you’ll enter the position, and an exit point where you’ll close out of the trade if it goes poorly. Don’t deviate from your plan, even if it means accepting the fact that you made a mistake.

Experienced traders make rational decisions based on what they see, not what they wish to see. They cut their losses short on the bad trades and let their profits run on the good ones. Most importantly, they don’t let their emotions get the best of them. No matter how excited you are about a current position or how high your hopes were for the stock, if the trade starts to go against you, get out.

Your most important money management goal is to get out of losing positions as quickly as possible. After taking into consideration normal up and down price fluctuations, you must develop a method of recognizing when a stock is not behaving the way you expected. Be prepared to close a losing position before it consumes too much of your trading capital. Try to keep losses below 5 or 6 percent for any position.

Alternatively, you can think in terms of your total trading capital and try to keep the loss from any single position below 1 or 2 percent. Just remember that there’s always another trading opportunity. If you close out of a position too quickly and miss out on a potential gain, don’t dwell on what could have been. Learn from the experience and move on to your next trade.