Trading mentor Van Tharp once stated:
Perhaps the greatest secret to top trading and investing success is appropriate money management. I call it a ’secret’ because few people seem to understand it, including many people who•ve written books on the topic. Some people call it risk control, others call it I diversification, and still others call it how to ‘wisely’ invest your money. However, the money management that is the key to top trading and investing simply refers to the algorithm that tells you ‘how much’ with respect to any particular position in the market.
He added:
John was a little shell-shocked over what had happened in the market over the last three days — he’d lost 70% of his account value. He was shaken, but still convinced that he could make the money back! After all, he had been up almost 200% before the market withered him down, He still had $4,500 left in his account. What advice would you give John? Your advice should be, “get out of the market immediately. You don’t have enough money to trade speculatively.” However, the average person is usually trying to make a big killing in the market, thinking that he or she can turn a $5,000 to $10,000 account into a million dollars in less than a year. While this sort of feat is possible, the chances of ruin for anyone who attempts it is almost certain.
I have been helping clients with these very issues in my trading courses for over a decade.
December 1st, 2009 at 3:56 pm
Money management and controling the downside risk is key to making money and not losing your shirt.
You might not make $1 million in a year but you’ll be able to trade again. I’m amazed at how many people don’t know what a stop is, don’t use them, put all their money into one position or hold 25+ positions with only a share or two.
That’s a sure way to lose money.
Trading is a two steps forward one step back game. You can’t go rock climbing without a rope and not expect to fall eventually.