In this week’s 4-Minute Drill, let’s dig into the topic of money management… even deeper than we have in the past…
Read the full video script below. Let us know how you handle your money management… and leave a comment below!
In this week’s 4-Minute Drill, let’s dig into the topic of money management… even deeper than we have in the past. Why is money management and your profit and loss strategies so important?Well, if you move forward with a money management plan you can be confident in… meaning one that controls your risk consistently and effectively… then you’ll be a trader who will go forward with CONFIDENCE and DISCIPLINE……knowing that no matter what, you’re not going to be taking any big hits to your account.OK… with that in mind… let’s start with the KISS strategy.KISS … K-I-S-S.. as you probably know, means ‘keep it simple stupid)…. so here we go…and please note that I’m talking here in GENERAL TERMS.
If the market is trending up, buy it. If the market is trending down, sell it.
If the market moves against you after you’ve opened your position, close out.
If the market continues to move in your favor, hold your position until you are happy with the amount of profit and close out your position.
In this fashion, you have only one decision to enter and that is to buy or sell.
WHERE TO EXIT is your money management strategy.
When exiting a trade you also have a number of choices
If you have a profit, you may nurse it along, hoping that it’ll reach your target. But even then, you might have the tendency to get greedy and linger a little too long hoping for a bigger move.
But if we move stops to protect profits or at least break-even (including transaction fees) we can take a chance.
Losses are another matter.
Traders hate losses and put full focus on getting out quickly-at the stopping price or before
If things don’t feel right, punch out.
It’s a game of probability and every loss just gets you closer to a winning trade.
Get out and move on.
The philosophy of ALWAYS BEING DECISIVE WHEN EXITING A LOSING TRADE is essential if you want to stay in the hunt.
A good way to think about it is … that when you enter a trade the market should move in your favor almost immediately.
If the trade doesn’t move your way almost immediately after you enter it, you are probably wrong and should get out.
This, of course, applies for long OR short positions.
You may miss a few wins, but it’s the losses that hurt and NOT missed opportunity.
For options traders, there are strategies that capitalize on sideways movement, so in those cases, no movement is the optimal… and movement in any direction is cause for concern.
My point here in the first part of this General Money management discussion is you can have an effective risk-control strategy that is spelled out in very simple terms.
.. and it all leads to one place…
KEEPING YOUR LOSSES SMALL is your first priority.
Do that, my fellow traders, and you’ll take a quantum leap toward your long term trading success.
In our next 4 minute drill, I’ll be hitting on a controversial Money Management approach… SCALING IN.
We’ll take a close look at that.
So until next week…