Traders Toolbox: Money Management 4 of 4

Posted on by lindsay

This is the final portion of the Trader's Toolbox: Money Management series. This post will recap the 5 main rules discussed. If you missed our previous post please click here for : Part 1, Part 2 or Part 3.

♦ Setting a goal - Decide what your trading objective is (quick profit and steady return) as well as your risk tolerance level

♦Diversification - If possible, allocate your finances between different products to avert the danger of getting wiped out in a single market. Don't go overboard, though; think in terms of three to five unrelated instruments. Stick to markets you know, rather than risking the unknown for the sake of diversification.

♦Deciding how much money to risk - The total amount you risk at a given time in a particular market group or on a particular trade should be based on a a percentage of your total trading equity. Exceeding your allocation parameters can result in overexposure.

♦Use of stop orders - The name of the game is preservation of capital. Placing conservative stops to cut your losses will ensure you are around to trade another day. Stick to the limits determined by your equity allocation percentages.

5 thoughts on “Traders Toolbox: Money Management 4 of 4”

  1. Hi David,

    You might also be interested in taking a look at a dynamic method of setting trailing stops, such as the Chandelier Stop. I also recommend you log in to INO.TV and watch the video A New Look at Exit Strategies by Charles Le Beau.

    -Steve

  2. I agree with David, I always seem to be taking out of my position using a stop....so I either set an alert, or an Advanced order based on market conditions (ie., if a price hits a certain lower limit, then place a limit order to get out of the position).

    Adam- I have seen other services that provide recommended stop levels that vary with stock strength and movement and will lower itself to avoid getting stopped out of a relatively strong stock overall. IS there any potential for this kind of feature to be added to Marketclub services?

    1. Jim,

      I thank you for your feedback.

      To answer your question about adding stops to the MarketClub service that would basically make us an advisory service which is not our goal or intention.

      Our goal is to help you understand how the markets really work and how you can figure this out so you have more confidence and that you can trade and make more money. If you use our trade triangle technology you could use those as stop out points which we do recommend. See how we filter the trades which allows us to get out of the market when it turns down at a relatively good level. A recent example of this would be in the stock indices where we have been out of the market since January 20 and 22nd. The markets have come down a great deal since that time.

      Lastly, stops tend to be a very personal tools for many traders. What may be a perfect stop for one trader may not suit your own personal risk profile and vice versa.

      You may want to look at this posting on stops that may answer other questions you may have.

      http://club.ino.com/trading/2009/06/how-to-use-money-management-stops-effectively/#more-1465

      All the best,
      Adam

  4. Adam:

    I am a subscriber and love your service. I also believe it is great that you are sharing these videos for free to all so folks can be better traders.
    I agree with your points - yet the key is discipline to trade. That is hard to do for all and for me as well. You certainly don't want to believe you are smarter than the market. I have seen too many casualties for that.

    The only comment I make is regarding stops. I use to be a fan of hard stop losses on my trades. Now I just put alerts in a few pennies above the stop price I want. I have found that the market makers know where the legitimate stop points are based on the charts and will take you down and then buy back for a gain. So I use alerts on my email or text and would rather do that then getting stopped out of a stock only to see it rise in the next couple of hours.

    david

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