The Basics Of Money Management

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When you begin investing, you’ll hear the term money management mentioned often. So at first the concept might seem a bit strange to you. But there’s nothing particularly upsetting about doing proper money management. In fact, there are quite a few people who think that money management skills are the top priority for an investor. Let’s take a look at the basics of money management.

The basic rules of money management are concerned with protecting capital

In essence, the main rule of money management you need to learn is to “not blow your wad” on one trade. You have to set up rules that you stick to religiously, in order to make sure any downside you experience is not fatal to your entire investment portfolio. You also use money management to ensure you get the most out of any winner’s you hit, and dump the losers fast enough so that they don’t wipe you.

Basic rules to follow

• Let your winners run. Don’t sell a winner until you maximize the profit you can get from the trade. Use a trailing stop-loss order to be sure.
• Cut your losses quickly at a pre-determined rate. Say 10% is the maximum you’re willing to lose on one trade. Set a stop-loss at 10% and you’ll be automatically closed out of the position if the stock goes against you.
• Decide how many trades you can lose on and still be profitable
• Set your rules and follow them. Only you can ensure that you live by your ruleset. If you careless ignore you own rules, your system of money management will fail.
• Always set a profit goal when you make a trade. If you honestly can’t make enough money on a trade, then don’t do it.
• Don’t ignore transaction costs. Transaction costs can end up being huge when it comes to investing.

Even if you lose on some trades, proper money management can ensure you are up overall

Making money over the long haul is what all investors are attempting to do. Those with good money management skills are extremely likely to succeed. Those who can’t get their minds around the idea will probably suffer. If you want to be a top-notch investor, bone up on money management today.

What money management practices do you use?

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