Too often investors come to the market table without proper money management training. They are keen to score, in hockey parlance, but not willing to backcheck. They are anxious to prove how smart they are, to bask in winning trades. Not surprisingly, these unrealistic expectations set investors up for a rude awakening. How many times have investors misunderstood the probabilities that are stacked against them. Good traders know these odds and manage their trades to minimize losses. Always.
There is no shame in acknowledging the truth: no trader will be right all the time. In fact, even the best traders will be wrong more than they are right. More sobering is another truth: every active trader will have extended periods of crippling losses. These drawdowns on capital are the true test of a trading plan. How does your trading deal with inevitable drawdowns? Would your capital be wiped out if you suffered 10 consecutive losses? Would your trading tendencies change? What does your trading plan direct to minimize the dangers of extended drawdowns?
These questions should be on the mind of every self-directed investor. Before entering a trade know your probabilities – probability of success, probability of meeting profit targets, and the probability of variable losses. Indeed, if a trader learns how to work with these probabilities and devises a money management plan, trading can become a manageable business. And a successful one.
A good starting point is your own trading record. Keep track of your trades. Learn about the basic metrics of your trading strategy and find tools to help turn these metrics into a systematic trading plan. Stock Trends followers should be versed in this kind of systematic trading, but an even more rigorous methodology will be advanced by Stock Trends colleague Brian Ault, whose Fulcrum Shift Trading venture will lend a powerful introduction to his M3 Money Management Modeler – a powerful application the guides traders through the risk/reward analysis of position sizing.
Visit the Stock Trends Traders Network and follow some of Brian’s informative tutorials on the M3 Money Management Modeler. Stock Trends would like to direct our trading audience to this extremely helpful and powerful money management tool.