Money Management For Stock Market Success

Once you have mastered the art of Fundamental and technical analysis you must be able to manage your money properly, even if you have the most trained eye in terms of technicals and accounting prowess for fundamentals you can still fail if you neglect money management. Money management allows you to trade over a longer period of time. Over that period you will be more successful and eventually you will have more winners than losers.

LEARNING THE HARD WAY

When I first started trading I completely neglected this area, I thought of it as irrelevant, as a result I lost my trading account several times and nearly gave up eventually. I use to be right with my analysis but my money management was letting me down insofar as I was making profits but a large loss would clear me out. My main instrument was contracts for difference at the time which had a margin of 10 - this means for every 1% move in the underlying my portfolio was moving 10%. Thats the power of margin.

2 % RULE

The 2% rule allows you to ensure longevity of your portfolio and gives you a opportunity to be successful in the long run, please do not dismiss it or consider it farsicle as this will help you be alive in the long run. the 2% rule states that each position size must be 2% of your portfolio and you are allowed to trade 3 times. Why 2%? Well you will need to be wrong 50 times in order to lose your entire portfolio and if this is the case maybe you should be looking to do something other than trading. Please do not consider me untowards as knowing your limitations is better than losing your pride. These rules were developed by Alexander Elder and I would certainly recommend his book called - Come into my Trading Room.

6% RULE

The 6% rule states that you are only allowed to trade 6% of your portfolio at any given time to start with, if you lose that 6% then you must sit out the entire month and regain your focus and awareness of the markets, paper trade if necessary and prove to yourself that you can step up. Look at the areas where you went wrong and remedy these areas, I keep posters on my wall with rules to constantly remind myself how to trade. You may have observed some great trades that went sour, look at the areas where you went right and extend this next time you trade. You ultimate aim is to come back stronger and sharper.

RISK TO REWARD RATIO

Always analyse your risk to reward on your trade, as always you should have predetermined areas to enter and exit on your trade. Make sure you have a 3:1 risk reward or better, this means that for every $100 you risk you can petentially be rewarded with £300.00, so if you are wrong 7 times out of ten your net loss is $700.00 but your net protit is 3*$300= $900.00 which is a net of $200.00. You must engrave in your mind that the better the risk reward is the less you have to win to make a net positive result.

These rules have been developed by stock market experts, I am just letting everybody know that this works. I now rarely lose my trading account and I am in a more elevated relaxed mood knowing that if I am completely wrong (unlikely) I will still remain in the stock market over a long period where I will see success eventually. Your journey will be slow but your ultimate goal will be approached quicker and in a less turbulant manner!

Read My next article on Stop Loss and Target Price

http://www.bukisa.com/articles/34188_using-stop-loss-and-target-price-on-stocks-

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