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Strategy – money management

I will trade only a small money account. The truth is I do not have more money to trade with. My account was originally larger than it is now, but this is a different story which I will explain later. My problem was that I was not disciplined enough to follow any rules given.

I am working on it and I set up rules which I am learning to stick with them as much as I can. Believe me, it is very hard. There is so huge temptation out there, impatience, quick-rich wishes, double guessing and more and more. The best way how to keep oneself on track is write your plans and rules down. This blog is not only the record how I am doing, how I did from the account inception, but it serves to me as my journal. If any trader decides to follow this way of managing her trades I would recommend either creating a journal log or this Internet blog. Not only others can see what the trader is doing, but even she can have this blog always handy without carrying any paper logs. The blog is always accessible wherever the trader is even from someone else’s computer.

However – never, ever write down any personal data on internet, no account numbers, passwords, nothing. Only the ideas and numbers displaying the account development can be used.

Today I deposited the last $150 dollars to my account so the total value of the account is slightly above $2,000 dollars. The broker allows me to use margin, so my buying power is now about $4,700 dollars.

To trade efficiently I created a money management plan which includes the total amount of the account can be invested, how many trades can be opened in one time etc.

The first rule is that I never use the entire account amount at one time. The rough rule is if the account doesn’t use margin, I invest only about 50% of the portfolio principal. If the account uses margin, I use as a principal 65% of the buying power and than I trade 75% of the new buying power. This will always protect my account against over-trading. I remember once I invested all my money even all my margin. When stocks dropped, margin was killing me and I had to start selling losing positions prior stop loss orders could be activated to cover margin calls. So I was killing my trades even when they showed one or two percent of loss which still wasn’t the reason for selling.

Next rule in the money management is that every open position can lose only 5% of the entire account value. Since I do not use the entire value for trading, this rule allows me to set the stop loss order deep down to 50% of any single position. It means that if one open position loses 50% of the value, it still will equal to only 5% of the entire portfolio value. Such a drop in a stock price won’t occur so often so with this stop loss I am protected against the market volatility. It seems pretty drastic to use 50% as a stop loss, mainly when almost every rules based on CAN SLIM or similar trading system say “cut your loses quickly at 7% – 10%”. If a trader sets up the stop loss 7% below his initial entry price, he would be stopped pretty quickly in a volatile market. It happened to me in couple last years when I became collecting 7% loses one after second. I know there are opponents who may say that when a trader enters the position in a proper time, when a stock breaks up from a sound base, he wouldn’t experience such bad results. Well, how many of new investors and traders are experienced enough to recognize such bases and proper buying points? I am definitely not one of them. I am also busy during a single day so I was looking for a strategy which can provide me with a peace of mind and I would not be required studying stocks so often and still making money. The Reverse Scale System (RSS) is the right solution. So even if I lose 50% on a single trade, it still will be only 5% of the entire account.

The next important rule is the number of open positions at one time. I plan to have approx. 10 open positions, but with such a small account it is not efficient. This account will always be riskier than larger one, but there is no other way how to do it. Everyone can always add more money and use different ratio between maximum draw down tolerance, opened trades and the entire account value. Since I have a very small account now, I set up my draw down tolerance to 25% of the entire portfolio. Since every single trade can lose only 5% I can open max 5 trades at one time. When the account value starts growing, I will change the control loss plan accordingly to afford 10 open positions and still be losing no more than 5% (actually on this, the goal is 3% only). However this will be adjusted later as the portfolio will grow.

 

Conclusion:

1) I will trade only 50% – 75% of the buying power of the account.

2) I will set up the stop loss order on each open position immediately after buying an initial position.

3) The stop loss order will be set up to a such value so when activated I will lose only 5% of the entire porfolio.

4) I will have only 5 open positions at one time (later this rule will be rebalanced).

5) I will keep track of any new buy with explanation why I have entered the trade (you will be able to see it on this blog as well).

6) Prior taking any new position I will calculate the loss control plan to see where the stop loss is and whether I am in the allowed limit on such a trade. By doing the calculation, I can determine not only how many positions I can take, but also how large the position can be to stay within the limits for possible loss. For example every initial amount which can be invested in a single trade was around $290 (before margin). After the margin was allowed I would use $466 dollars for a single position. These values when multiplied with max allowed open positions shall be within 50% – 75% of the entire portfolio, if not I will be over-invested.





2 responses to “Strategy – money management”

  1. Sue Massey says:

    Nice writing style. I look forward to reading more in the future.

  2. Martin says:

    Sue, Thanks. I am trying my best. Typically I will post every Friday and during weekends. During weeks I will post only if some new picks occur in my screener and if I would have some time.

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