When I first started trading stocks, whether it was buy and hold or short-term trading, I had no clue about how to manage my money. I just knew that I had to diversify because that's what everything I was reading was telling me. I remember opening my first stock account with Etrade with $1000 and bought three stocks, PAYX, AMD and ISON. Not only did I not have an investment/trading plan (entry, exit, target, etc), I had no idea how much I should allocate to each stock. I just knew that I was going to buy these companies and hope that they were going to succeed, forcing their stock to go up.
Since then, I've learned to manage my money according to my risk tolerance and have set rules for maximum position sizes.
Rule #1: I will not invest more than 10% of my total trading capital in one position.
Rule #2: I will not loose more than 2.5% on any one position.
Rule #3: My maximum daily loss cannot be more than 1% of my portfolio. (Luckily, I've never had to satisfy this rule...knock on wood)
A few other general guidelines that I follow include:
-Don't try to win on all your trades. It's impossible, so accept the losses. Its part of the strategy.
-As risk increases (bear markets, higher than desired entry, big market swings, etc), go with smaller positions to reduce your exposure. Go with 1/4 or 1/2 size positions, if you feel like you still need to be in the game.
-Have a good reason for entering the trade/investment. In other words, don't buy a stock just because you can or are bored.
-Sell partial positions as stocks increase to lock in profits. Its better to lock in some profits than get none at all.
-Use stop losses and raise your stop loss positions as the stock value increases.
-Don't get attached to any stock or company, it may prevent you from selling at your target gains or losses.
-Ensure the risk/reward is in your favor by at least 3 to 1. For example, be willing to risk 5 cents for a potential gain of 15 cents.
Learn to survive in the stock market and the profits will follow.
Hope everyone has a great and prosperous 2012!
JP
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