Learn The Stock Market And How to Trade

This is a bit of a continuation from yesterday’s conversation on how much money is needed to invest or trade.  Today I want to talk about trading money management.  First, unless you can come up with a 100% win ratio trade strategy you’ll have to have a trading money management plan.  First you’ll have to look at your win to loss ratio and your average win compared to your average loss.

First let’s look at a 50 – 50 win/loss trade strategy plan with at 20% average win and a 10% average loss of the portfolio.  With a 50/50 chance you have about a 1 in a 1000 chance of a 10 loss losing streak.  If you trade twice a day it is likely to happen every other year!  What would this do to your account?  After ten losses you’d be down about 66%.  This may be fine by the numbers because you know you’ll win in the long run, but could you handle it in the heat of the moment?  Also, if you have to live off a percentage of your trading account could you live with the year you’re down 66% to pay the bills?

Now say you have a 50 – 50 win loss where you average win is 5% and your average loss is 2%.  You’ll gain slower over time, but you’re draw down is only 20%.  The ride won’t be so bumpy and you can depend on your portfolio a little better at any given time.

The choice is yours – some like high probabitlity little wins, others perfer low losses low percentage wins that are large to carry the balance.  Figure out who you are and pick a strategy you can live with, even if you go 10, or even 20 losses in a row.

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