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Articles : Trading / Financial Astrology

Money Management in Trading

All the following principles are towards survival in the stock market over the long run. Please note that a lot of people try their luck in stock market but only a few remain in the business for a long time!

First and foremost important principle is "Capital conservation"

The following measures will help.

1. 1% Rule: Traders should limit loss to maximum of 1% of total capital for any one position.
   I will elaborate this further.
   
   Suppose your Trading Capital is Rs. 250000 then your Risk Amount Per Trade should never exeed Rs. 2500. You should put a stop loss and should not alter it when it is about to get triggered!
   
   When trading with Futures I generally see to it that I put Stop Loss Orders but while trading options as a buyer (while buying naked Calls/Puts) I tend to forget (only to repent later!) this above Stop Loss priciple due to relatively smaller amount to be paid at the time of purchase.
   
   As a option buyer and especially not adhering to Stop Losses in Options Trading my Trading accounts have bled quite a lot in long run!
    

2. Always use Actual Stops. No mental Stops!
   For overnight positions especially in Futures consider hedging with options since NSE is not allowing us Good Till Cancellation Stops.
    

3. Prefer to trade in the main direction of the larger trends.
   In a Bull Market: look only for opportunities to enter long.
   and
   In a Bear Market: look only for opportunities to enter short.
    

4. Always assess Reward/Risk Ratio.
   Enter a position only when Reward/Risk Ratio > 2:1.
    

5. If you are day trading then Maximum of 3 trades to be traded per day. That too if you get stopped out with loss 2 times in row then better to stop trading for that day.
   Further if you lose 3 days in row stop for that week. This will automatically take care of your bad time period.
    

6. Always Diversify. Never too much in one or one type of trade.
    

7. At the end of week or month take out at-least half of your earned profits away from your trading account so that you would not be tempted to risk it later.