Free Trading Plan

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 Paste, copy and print this, a new lesson will be posted every day. Each lesson will build on the day before.

Lesson number 2   Money

* You must set in stone the most important thing with money management – protecting

your capital. Even though your primary motivation is to make money and you consider

this important, protecting your trading capital is even more important. How can you

make money, if you don’t have any money to trade with?

* The most important trading rule is to cut your losses. To do this, we use stop losses.

A ‘stop loss’ is a pre-defined level (price) at which you will exit a trade based on the

premise that it is not moving in the direction that you had anticipated, and therefore you

are losing money. The first thing was how are you going to set your stop loss point?

* One of the best ways to manage your risk when trading is to limit or set a cap on how

much money you put into a single position. This is to guard against the possibility of

something adverse occurring. What is the maximum percentage of your trading capital

you are prepared to commit to a single trade?

* Another crucial part of money management is position sizing. How are you going to

position size? Examples include the equal portion method and the model based on your

risk amount and where you position your initial stop loss. Which one are you going to

use? Second, what is going to be your maximum risk exposure across your trading

portfolio at any one time? Will you limit the number of trades based on how much risk

capital you have at risk across all of your open trades?

* What happens if you keep losing money? This question has little to do with trading but

rather your own financial situation. Are you prepared to lose every cent of your

allocated trading capital before you are forced to stop, or do you think you would like to

hold on to some of the money and commit it somewhere else, with the plan of either not

trading again for an extended period of time or giving up altogether?

* Further on trade size - if you have had 3 losses in a row, the probability that you are

going to have a profitable trade doesn’t automatically shift in your favour. Nor does it

continue to shift as each losing trading passes. Don’t increase your trade size thinking

your next winner is just around the corner. After a few losses, your trade size should be

decreased slightly to reflect your diminished trading capital.

* Liquidity is your ability to trade in a stock without adversely affecting the market price

due to insufficient buyers and sellers in the market for that stock. You never want to be

stuck with a stock that you need to exit from just because there are insufficient buyers

in the market. How are you going to measure liquidity and what will be your minimum

level you will accept?

* Volatility is directly linked to risk. Would you consider using a minimum or maximum

filter for volatility percentage? In trying to avoid speculative stocks, will you only enter

trades when the price is above a set amount? If so, what is that amount?

* There are numerous products available to trade including shares, futures contracts,

options on futures as well as options on stock, currencies (foreign exchange), CFDs and

more, and they all have different risk profiles. If you are trading multiple products, how

are you going to allocate your capital accordingly based on the different levels of risk?

* What would you describe as an adverse move against you and what will you do should

it happen to you? Second, under what other circumstances will you consider selling

regardless of what exit points you set?

* Now to some happier money management areas – selling with a profit. How are you

going to trail the stock price with your exit once the price moves higher? How are you

going to calculate this?

* A strategy for to consider is pyramiding – adding more money to a profitable trade.

Will you consider pyramiding into profitable trades? If so, at what point will you

purchase more shares in the company and how will determine how much more to buy?

* Similar to the mindset area, there is a lot to learn about managing your money in

trading. Telling you to cut losses is one thing – executing that ruthlessly and without

hesitation can be another. Working out that you are going to use a 10% trailing exit for

your trades is all well and good – sticking with that and not changing the rules half way

through a trade can be another challenge altogether.
The next lesson will be posted tomorrow. Keep checking back. Free-Trading-Plan