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Trade Management Equals Win or BrokeImportance of Trade Management
Do you know that even though a group of traders buy the same stocks or options at thesame time, some of them may become millionaires over time and some of them simplygo broke?All things equal, the most important factor that determines if you would become amillionaire (or billionaire?) or a complete loser over time trading in the stock markets isnot how accurately you can pick stocks but how you manage your trades! Yes, portfoliomanagement, or on a more micro scale, trade management, is the only factor thatdetermines whether you make it or not in the stock markets!
Trade Management Example
John and Peter are 2 stock traders who agreed at the same time that XYZ company stock is bullish and decided to buy XYZ stocks together.XYZ is trading at $10. John and Peter have $1000 each. John decided to put all hismoney into XYZ stocks and bought 100 shares of XYZ stocks. Peter decided to stick tohis trade management strategy of using no more than 30% of his equity into any onetrade. Peter then bought 30 shares of XYZ stocks.As it turned out, stocks that are expected to go up usually come straight down. Instead of going up, XYZ company stocks fell from $10 to $6 within a few days. Both tradersdecided to sell their positions in order to preserve equity. John is left with $600 whilePeter still has $880.Both traders then bought ABC company stocks trading at $20 with the same trademanagement strategy. ABC rallied from $20 to $35 and both traders sold their positions.John is now up to $1050 while Peter is now up $1078. Peter remains ahead of John on thesame moves while risking only 30% of his equity.Both traders then bought RAT company stocks trading at $100 with the same trademanagement strategy and this time, RAT was delisted. Both traders lost all their equity inRAT Company. John is now left with nothing while Peter has $754 left.The example above is based on the worst case scenario which is familiar to many veterantraders. You would see that Peter’s 30% trade management strategy reliably reduceslosses and because he lost less money than John, he needs only make a lesser amount to beat John to it. Over time, Peter will out-perform John. See what I mean?
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