Avoid the risk of ruin

TATrader · #1 27th July 2004, 10:22 AM

Avoid the risk of ruin

Fine tuning your money management system.

When you hear of someone making a huge killing in the market on a relatively small trading account, more likely than not it was a fluke:

You can read more at http://www.traders.com/Reprints/PDF_...s.html$TC_FINE

Anil · #2 27th July 2004, 12:17 PM

Excellent article.

I think that every trader should print this article and read it ever so often.

Traderji · #3 27th July 2004, 06:44 PM

The key components of a successful trading plan are an edge, discipline, risk control, and money management.

Controlling your risk

Successful speculation is all about managing risk. A winning trader always knows how much they will lose, but rarely know how much they will make. The key is to never let a single trade or single event (that may impact on multiple positions) have a major negative impact on the trading account.

"Never, ever, trade without a stop-loss order. If you don't know what a stop-loss is, you should not be trading."

Money management

A basic investment tenet states there is a direct relationship between risk and return. Trading is no different - the greater the account value risked on a single trade idea, the more volatile the total returns from the trading strategy will be.

A simple strategy is to never risk more than 2% of your trading account on a trade. Most professional money managers will risk a fraction of 1% on a single trade.

"There are many bold traders, but there are very few old, bold traders".

The Difference between the professionals and the novices.

The "Professionals" fit the following profile:

they trade completely objectively using mathematical models to arrive at trading decisions, there is no emotion involved;

their ideas are well researched to ensure their strategy has a definable edge;

they follow trends in prices, by controlling their risk and allowing profits to accumulate;

they realise the market is not predictable, so employ techniques that will profit by recognising trends, rather than anticipating them.

The "novices" fit the following profile:

their trade strategies are usually based on esoteric analytical techniques that are highly subjective, making it difficult (if not impossible) to determine the provision of an edge;

they have a pre-occupation with forecasting prices or dates on which trends in the markets will reverse (ie a belief that the markets are predictable);

by design, their subjective strategies make a disciplined trading approach difficult as it is too easy to "bend the rules";

they pay little attention to risk control and money management.

One final quote:

"Winners hold their winning trades, losers hold their losing trades"

TATrader · #4 28th July 2004, 08:08 AM

Quote:

"There are many bold traders, but there are very few old, bold traders".

LOL, rightly said Traderji!

Neal · #5 3rd August 2004, 10:58 AM

Quote:

"Winners hold their winning trades, losers hold their losing trades"

very apt..

After my many years.. I have finally realised this!

There are many fundamental misconceptions about markets and trading!

The beauty of trading is that it becomes an expression of your own personality. Good traders don't do, they simply are. But to become a good trader you have got to find the approach which will work for you.

Anil · #6 4th August 2004, 08:07 AM

The famous psychotherapist Fritz Perls once noted that people feel anxious and fearful when they worry about, and mull over, their past mistakes or worry about the future. A peak performance mindset is where a person focuses on the ongoing action, the here-and-now experience. The more you can stay in the moment, rather than worry about the past or the future, the more you'll be able to trade profitably.

However if you must mull, then worry about the future. Think positively, gain as much experience as possible, and move forward. Don't mull over the past, looking for past errors. You will just waste your time worrying, when you could be trading and building up the skills you need to trade profitably and consistently.

binzy · #7 21st September 2004, 03:34 PM

The legendary trader, W. D. Gann, formulated 24 rules for successful trading in his book "45 Years on Wall Street". They are:

1. Never risk one tenth of capital in one trade.

2. Always use stop loss orders.

3. Never overtrade.

4. Never let a profit run into a loss.

5. Do not buck the trend.

6. When in doubt, get our or dont get in.

7. Trade only active stocks.

8. Equal distribution of risk in 4 or 5 stocks.

9. Trade market order.

10. Dont clsoe your trades without a good reason.

11. Accumulate a surplus

12. Never buy just to get a dividend.

13. Never average a loss.

14. Never get out/in of the market because of impatience or anxiety.

15. Avoid taking small profits and big losses.

16. Never cancel a stop loss order after you placed it.

17. Avoid getting in and out of the market too often.

18. Be just as willing to seel short as you are to buy. Let your object be to keep with the trend and make money.

19. Never buy/sell just because the price is low/high.

20. Wait till the stock is very active and has crossed resistance levels before pyramiding.

21. Select stocks with small volume of shares outstanding to pyramid on the buying side.

22. Never hedge one stock by another.

23. Trade with a plan and do not get out without a definite indication of a change in trend.

24. Avoid increasing trading size after a long period of success.

sh50 · #8 1st October 2004, 09:53 AM

THE PDF ARTICLE WAS EXCELLENT. THE EXAMPLE IN THE END IS NOT CLEAR

Trading account is Rs 500000

Margin 150%

Trading account size is 75000

2% Risk allowance = 1000

IBM TRADE ENTRY-91.49

IBM STOP 90.23

DIFFERENCE BETWEEN STOPS-1.26

COMMISSION 51.22

HOW DO THE NUMBER OF SHARES COME OUT TO BE 753. ACCORDING TO THE FORUMULA, IT COMES OUT TO 959. KINDLY CLARIFY. THANKS.

Neal · #9 2nd October 2004, 11:21 AM

The calculation is done on a trading account size is 50,000 and not 75,000 (this is the trading account size using margin)!

Saint · #10 5th May 2005, 07:42 PM

Nice write-up by Traderji.....another must read.

Similar Threads for: Avoid the risk of ruin
Thread	Thread Starter	Forum	Replies	Last Post
What is money management	CreditViolet	Risk & Money Management	64	6th July 2008 07:06 PM
Gambler Or Technician	CreditViolet	Words of Wisdom	11	26th February 2008 11:09 PM
Key risk for stockmarkets?	nkpanjiyar	Equities	18	22nd May 2006 12:35 PM
To Avoid Market Manipulation	sachin divase	Equities	6	8th June 2005 08:41 PM