| MONEY MANAGEMENT is one of the hardest aspect of trading stocks. A lot of your own individuality will come into play when trying to let go of a losing hand. While it might sound as though selling a failing stock would be the most logical thing to do to avoid further losses, in actual practice it becomes one of the hardest things to do. |
| You MUST decide at what point you will EXIT your trade BEFORE you ever place it if you want to even hope of letting go when it turns against you. |
| You may decide to set a loss level at 7%. This would mean that when you purchase your stock, you would calculate your break-even point, that which would cover your entry and exit commissions even if you sold and made nothing on the overall trade. From this value you would subtract 7%, ( or simply multiply your total value by 0.93 ), to arrive at the price where you should sell and not lose more than a total of 7%. |
| If your commission make up 5% of your trade, then you will not be able to stand much of a backward move before you will need to let go and walk away. If you stay longer in hopes of it reversing and it doesn't, then the losses just grow larger and larger as you sit hoping for a reversal that may never come. If you let that continue, you will miss other trades that may have easily covered your 7% and went on to make you a considerable amount more. |
| Nobody knows what is going to happen from one day to the next - nobody. At least not legally they don't. |
| This is why it is important to figure all of your expenses to open and close the trade and to determine where it is that you will get out of the trade. That decision alone is the HARDEST thing to do once you are actively holding the trade. This is because human nature makes it difficult for us to admit that we were wrong and did not make the correct decision when we entered the trade. In addition to this, chances are that you will have told others about your great stock of choice and now you are concerned with their thought if you should drop it and run when it just may turn around and go up without you. |
| You must make these decisions on your own and stick by them without any outside influence causing you to change your direction. When you lose and when you win, you and you alone are responsible for the outcome and you will have only yourself to blame. If you would try blaming it on anybody else, they will not be there for the next trade to blame, and you will be left with yourself once again to make the decisions. |
| Trading can be very rewarding and profitable and it can also be very frustrating. In any case, it is a great teacher about yourself as you will no doubt discover things that you never realized about yourself. You will be surprised and you will be disappointed. In any case though, you can benefit, if you keep a running record of your emotions, thoughts, feelings, decisions, and any other outside influences so you can look back on these later to see how you deal with them. |
| When you do this on a DAILY BASIS, you will be ready when you have saved enough money to trade with, as you will doing it on a daily basis when you are actually in the market. When you have a trade open, you will not forget about it over the weekend or at night when the market closes. If you have not been paper trading on a daily basis, but only when ever you thought about it or only when you had time and things were going well, then you are going to be in for a VERY ROUGH ride and you will most likely lose your money as well as your confidence in yourself. The odds are that you will walk away from trying to trade stocks on your own and will at best, let a broker trade for you and then you will try second guessing him every time he has a losing trade for you. |
| You ARE going to lose some times. In fact, you may lose more often than you win. But if you limit your losses and let your winning hands run, then overall you should walk away a winner when you are finished. |
| Remember that RULE of 72 and you will do just fine. |
| Try to make a fortune in your first few years of trading and you will most likely not last long enough to learn very much about a very enjoyable and rewarding way of making your money work for YOU. |