Money Risk Management for Share Trading Kept Simple
More than 90% of people trading the share market lose money because the majority do not use correct Money & Risk Management principles or have the discipline to follow them.
Money Management, Position / Trade Sizing No matter what you call it, You Better Know It!
Never risk more than 2% of your trading capital on any one trade. e.g. If you have $30,000 your maximum risk is $600 but what many forget is to also cater for brokerage. If it’s say $50 RT your maximum risk is now $550 and a stop is set appropriately so if your share drops in value by $550 you exit first opportunity.
Never Trade with more than 20% of Trading Capital on any trade.
e.g. Again, if you have $30K your trade size would be $6000 but I prefer to use 19% so if I have 5 open trades and will still have 5% of my trading capital out of the market to allow for things like slippage, education, data, etc.
Here’s a simple mistake many make regarding their Trading Capital:
e.g. My 1st trade is now worth $7000, up $1000 so I decide to open my 2nd trade.
Do I base my next trade TC value $26,000 or $20,000 or $25,000 again?
The correct method is to first determine the share value if your current stop was hit. You may be up $1000 but your trailing stop is set and hit you only make less, say $900 so the next calculation would be based on $30,000 + $900. Your true Trading Capital is your available Cash + the value of all open positions if all stops were hit.
”The only things in life that are certain are Death and Taxes!” Benjamin Franklin
So it should be noted that past performance is not a reliable indicator of future performance but you can control the risk you’re exposed to.
It’s the 21st Century and it’s quite normal to manage one’s own investments, yet very few implement disciplined, professional money risk management principles or understand them. During the stock market boom, limiting risk was always an afterthought, but given the recent volatility & market conditions, let’s get serious!
Professional Money and Risk Management strategies, used correctly and together, will be your foundation to trading success. Essentially, Money Management tells you how many shares to trade at any given time and Stop placement is where you must accept you have made the wrong decision, close that trade and move on. It is a defensive concept that keeps you in the game to play another day. Don’t confuse Money Management with Stop placement. Stop placement does not answer the question, how much?
Risk Management is the difference between success and failure when trading shares. It refers to Stop placement and will minimize any losses and you will have them but will also maximise any profits and this stop is called a Trailing, Maintenance or Profit Stop.
Money Management optimizes capital usage. Few have the ability to view their portfolios as a whole. Even fewer traders and investors make the move from a defensive or reactive view of risk, in which they measure risk to avoid losses, to an offensive or proactive posture in which risks are actively managed for efficient use of capital. JBL Risk Manager will help you do all of the above.
More info: www.paconsulting.net.au/Share-Trading-Investing-FX/jbl-risk-manager/
I wish you all trading success!
Joseph
