Protecting your Trading Capital
By Joseph Barrington-Lew
www.paconsulting.net.auMore 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!
"Money Management is like sex: Everyone does it, one way or the other, but not many like to talk about it and some do it better than others. But there’s a big difference: Sex sites on the Web proliferate, while sites devoted to the science of Money & Risk Management are somewhat difficult to find." - Gibbons Burke
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 if hit you make less, say $900 so the next calculation would be based on $30,000 + $900. Your true Trading Capital is your available Cash + or – 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 a more efficient use of capital. JBL Risk Manager will help you do all of the above and very easily.
JBL Risk Manager is a simple but Professional Money Risk Management program that was specifically developed to combat the above problem BUT unfortunately the trial is currently only available to those that receive or have access to MetaStock format data. It will automatically calculate your Trade Size, Stop Loss price, Trailing Stop, Break-even price and so much more, based on the last close. It will, of course, also allow you to change your anticipated buy price to actual buy price (slippage) It will indicate when to look for another trade and also automatically report on your performance by showing you your portfolio %win-loss ratios, average $win-loss, trade expectancy and much more, accurately. The latest version now includes, with permission from The Van Tharp Institute, performance values such as R-Multiples, R-Expectancy and System Quality Number. I hope you give this program a trial. After more than a decade helping novice and seasoned individuals understand the importance of Money Risk Management I am pleased to say this simple program will do that and remove emotion and guesswork from your trading decisions.
You also have available to you a facility to enter a Technical Stop as your trailing Stop, if you wish, but after many years of testing and research I have found that most use Technical Analysis for entry and correct Money Risk Management for their exit. Long term investors may use Fundamental Analysis to find financially healthy companies first then TA for entry and MR Management for exit. That is all for now.
More info:
www.paconsulting.net.au/Share-Trading-Investing-FX/jbl-risk-manager/ The 14 day FREE trial is available at the above link.
You may wish to also view a video of the program at
www.youtube.com. Simply enter Money Management Software intro into the search box.
I wish you all trading success!
Joseph Barrington-Lew
