One of the most difficult qualities of being a successful trader is learning good money management. It's completely possible - and actually pretty common - to see people turn out to be right on a high percentage of their trades and still lose money. How is that possible? If you don't use good money management by locking in profits, taking small losses on the picks you're wrong about, and controlling your use of margin, eventually you'll lose it all, no matter how good a trader you are.
Once you've decided your trading objective, and what market you'll focus on, youll need to develop a stock trading system. Hundreds of different stock trading systems already exist, and you can certainly learn about or you can develop your own. Whats important is that you can objectively evaluate the stock trading system to ensure it meets your needs and that it performs well.
Money management is the system by which you determine how much to invest in any given trade. the reason most new traders fail does not usually relate to their lack of understanding of technical indicators. it is mostly due to lack of poor money management. you can make a mistake in your analysis and the market could be fairly forgiving, but you can't make mistakes in
Money management and expect to survive.
New Investors tend to participate in seesaw money management. new traders find a strategy or technique to trade, and they begin small. After a few wins, the trader invests a larger portion of their portfolio in the subsequent trade and lose. Because the trader invested much more money in the loser than in the previous winners, the loss out paces the winners and the trader panics. The amount of money placed in the subsequent trade is much less because the trader is spooked and does not want to lose again. After a few winning trades the trader repeats the process and invests more to once again lose. You don't have to repeat that scenario very many times before you have lost a significant part of your portfolio.
The problem of seesaw money management is obvious. A trader does not have a system telling them how much money they should invest. they inevitably invest more money when they are due for a loser and invest less money when they are due for a winner.
Even aggressive traders won't put more than 50% of their available balance in the market at one time.the rest may be reserved for fixed income,such as annuities, real estate, or other investments.
trading can be quite the roller coaster ride, and having a reserve outside the market helps smooth the emotional bumps of the ride.
You should look for low risk investments to offset your high risk investments.
choose what you are most comfortable with, such as risk - free investments (government bonds). You should regularly reevaluate your trading account to adjust the balance between aggressive and conservative positions as your trading account grows. twice a year will do.
Decide beforehand how much you are willing to risk in a single trade.
A successful trader will define risk as the Maximo amount of money they are willing to lose in a bad trade. if you are willing to lose a $1 in a trade, then your maximum risk is a dollar. although your maximum risk is only a dollar the stock itself may actually cost much more. if you bought a 425 stock and you set your stop loss at $23, your risk is $2, not $25.
You maximum risk is not actually the place you will exit the trade, that is the safety net you have in place in case things go wrong.One of the most difficult qualities of being a successful trader is learning good money management.
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The best stock trading ideas at the Penny Stocks Blog where making money is the goal.
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