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Trading Guru Reveals Personal Money Management Secrets - Hidden Tactics
That Ensure Trading Profits
By: David Jenyns
How personal money management works: In the markets it`s possible to be right,
and to still lose money. In fact, it`s pretty common. Traders who win on a high
percentage of their trades often end up with their capital eaten away, and
nothing to show for their work. They lose their gains because they don`t know
how to manage their money.
Being a good manager of your own money is one of the most difficult trading
skills to learn. But if you don`t use good personal money management to lock in
profits, take small losses on the picks you`re wrong about, and control your use
of margin, eventually you`ll lose everything, no matter how good of a trader you
are. You need to make protecting your capital your first priority if you want to
be successful.
As a trader, your capital is the most valuable thing you have. Without it, you
can`t trade at all. For this reason, bringing in no profits on a trade is better
than losing any part of your capital. If your account is intact, you can always
make a profit another day. If your capital has suffered a loss, you`ll be
wasting effort playing catch-up. The more you`ve lost, the longer it will take
to get back to where you started from, because you`ve got more to make up for,
and because you`ll have a smaller chunk of capital to work with. A smaller
capital base means smaller percentage returns on profits. Making 10% on a
$10,000 account earns you $1,000, but if you`ve lost half of that account and
have only $5,000 left, making 10% on your money will earn you only $500. You`d
have to do that twice to make the same $1,000.
Sound personal money management has two main goals: to avoid losing money, and
to avoid missing profit opportunities by tying up capital in problem trades for
long periods of time. Failing to avoid either of these will cost you. The first
goal is straightforward. You want to preserve your capital and whatever profits
you`ve accumulated. But you don`t just want to keep your capital, you want to
trade with it as well, to continue to grow it and make your returns larger and
larger.
Working to avoid losing those profit making opportunities isn`t quite as obvious
a goal. With the second goal in mind let`s compare the outcomes of two
money-management decisions. Trader A buys a stock, expecting it to go up, and
finds that it doesn`t. However, he`s certain it will go up eventually, and he`s
incurred a small loss, so he decides to wait it out. He ends up holding the
stock for three months before finally selling it. Trader B buys the same stock
at the same time as Trader A, but once he sees that it isn`t going up, he sells
it at a small loss. He buys another stock and makes a 15% profit on it. His next
trade loses 1%, but after that he makes 8 %, 15%, and 30% on a series of trades.
Because he is growing his account, he makes these percentages on a larger and
larger base of capital each time. At the end of three months, his account has
grown by 48%.
Whose personal money management decision turned out to be the best? While Trader
B made a nice profit, Trader A not only lost time but also never made his money
back. Even if he had made his money back on that stock, it`s hard to see how
this was a good use of his capital over the course of three months.
Clearly the goal of not tying up your capital in problem trades has an important
impact on your profits. Practising sound personal money management will keep
your capital and your profits safe. Though it is a difficult skill to learn,
once you know how to practise good personal money management, you can almost
guarantee that you will be a success as a trader.
About the Author:
Trading Secrets Revealed is a step-by-step trading roadmap to having excellent
money management. http://www.trading-secrets-revealed.com
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