I feel it would not be proper for us to start without first looking at MONEY MANAGEMENT. It will be the single most important issue in a trading career success regardless of the method you finally decide to implement. I don't claim to have the worlds best method, what I do have is good money management. If you also have good money management you are far ahead of 90% of the guys out there in the chatrooms trying to trade.
One thing is more important then any method of trading anyone could ever teach you. That is money management. If you have poor money management skills, you could have the best trading system in the world, one that is right 90% of the time, and you will still lose all of your money. On the other hand, with good money management skills, you could have a fairly inaccurate system, and still get respectable returns. Money Management is so important that studies have shown that up to 90% of the variance in fund manager performance can be ttibuted to money managment.
My primary concern in trading is to be here tomorrow, and if every day I guarantee my tomorrow, I'm going to make a lot of money. I don't worry about making millions of dollars a year, I take small, well calculated trades, knowing that this will build my account slowly, with small. My concern to be here tomorrow will eventually ead to my "small" gains, basically if you think of this in baseball terms I am trying to win the game by hitting singles and doubles and stealing a few bases, be rather large. My risk model calls for never under any circumstance risking more then 2% of my accounts equity on any trade. This is my insurance policy for longevity. If I am only risking 2% on each trade, I can be wrong 10 times in a row, and still have over 80% of my capital available to trade with. If you combine this money management with the accurate set ups that will follow, you will be able to trade for as long as you wish to.
Now, what does this 2% risk model mean, how is it implemented? Let me say first what it does not mean: Say I have a $20,000 trading account. I can risk 2% of this account on a trade, so that means $400. I want to buy XYZ Inc at $25. $400/$25= 16 shares. Well, you could do that, but you would slowly bleed to death due to commissions. So, we must use something else. What my 2% risk rule means is this. I want to buy XYZ Inc at $25, and my stop is 23 7/8. I still have a $20,000 account so I am risking $400. What my risk model means is that should I be wrong, I will lose $400. I can trade up to 355 shares of XYZ Inc given my stop loss and risk management. I always round down to the nearest hundred, so in this case I would trade 300 shares. Even if the model says I can buy 399 7/8 shares of a stock, I will still only trade 300. It is better to error on the side of conservative.
Brandon
