Deconstructing Personal Money Management

Any advanced stock trader already knows the importance of personal money management.

In the stock market, one can be right, and still stand a big chance of losing money.

In fact, this is pretty common than you may want to imagine!

Stock traders who win on high percentages of their trades often end up with their capital being eaten away and basically nothing at all to show their efforts.

They lose significantly since they do not understand this concept of personal money management.

Here’s how to stay safe: Being a wise stock trader and manager of your money is one of the best qualities you can ever posses as a stock trader.

Still, it is one of the most difficult skills to learn in stock trading. It requires years of practice!

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As stock traders, your capital is the only thing you’ve got. Without it, you won’t trade at all.

It’s for this reason that bringing in no profits on your trade is way better than losing even part of it.

In case your account is stable, you can always make profits another day.

However, if your capital suffers a loss, you’ll be wasting your time and efforts trying to catch-up in the market.

The more funds you lose, the longer it will take you to get back to where you started from, since you’ve got more to make up for and also because you’ll be having a slightly lower amount of capital to work with.

The size of your capital does not matter when you start off as a trader.

Always remember this.

A smaller capital base implies a smaller percentage of returns on profits.

However, it also means a smaller amount of capital to manage.

For example, making 20% on a Rs.15,000 account gives you Rs. 3000, but if you’ve already lose a significant percentage of that account have just about Rs.5000 left, making 20% on this amount will earn you only Rs.1500.

You would have to do that twice in order to make the same Rs.3000.

But on the brighter side, you need to take care of only Rs. 15,000 while you are still learning the ways of the market.

While you are seasoned and ready to take on bigger challenges, having a larger capital to trade with is a definitely a better choice.

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Both goals are fair and straightforward.

You definitely want to keep your capital as well as your profits.

No one just wants to keep the capital but trade with it as well, in order to grow it and boost your profits larger and larger.

Working to avoid making losses is not quite as obvious as it may seem.

With both goals in mind, compare the outcomes of two money management decisions.

Consider a stock trader who purchases a stock hoping for an increase, only to find out that it doesn’t.

However, he/she is certain that it will rise ultimately, and hes incurred a slight loss, so he chooses to wait it out.

This means he/she will end up holding the stock for another, say three months before selling them.

Trader B, on the other hand, purchases the same stock at a similar time but as soon as he realises that it wont rise, he chooses to sell it a slight loss.

He then purchases a new stock making a 20% profit on it.

He unfortunately loses a 2%, though after that he makes another 10%, 15% and 40% on a series of other trades.

Because he is simply growing his account, he makes these returns on a larger capital each time.

At the end of the 3-month period, his account will have grown by 48%.

So of the two whose personal money management decision yielded more or turned out to be the best?

While stock trader B made a higher profit, Trader A not only lost time but also never got his money back.

If he had got his money back on that stock, its difficult to see how this was of good use to him over the three months period.

Thus, the objective of not tying up your capital in a problem trade has a significant impact on your profits.

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