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
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
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.
David`s most recent course Trading Secrets Revealed is a
step-by-step trading roadmap to having excellent money