You must manage your money well, or you can lose it all.
Trading without a plan is as good as an idea as driving blind. Money management defines your risk. It also gives you a way to set aside a set dollar figure per trade each and every time.
We don’t know if any next trade will be a winner or a loser.
If I knew that 7 of my last 10 trades would be a winner, but I didn’t know which ones, how would I allocate my capital risk? To be safe, we’d allocate up to 5% max on each trade. This way, you control your risk without risking the farm. I apply the same risk to each trade.
Depending on whom you speak to, experts say to risk 1% to 3% of working capital on any one trade. The most I’d say is 5% max. If you have $50,000 in capital, maybe use $2,500. If you have a $5,000, account, maybe risk $500 to start out.
You can always work up.
Or, if it’s not money management destroying your portfolio, it’s the lack of a stop loss.
As an investor, you should be familiar with a stop-loss, or the order given to a brokerage to sell a position once it drops by a certain amount or hits a certain level.
We can also employ trailing stop losses, as well, which remove the emotion from your trade. What’s nice about a trailing stop is that it will adjust higher as the price of an asset rises, thus allowing the investor to lock in gains. For example, if a long position were bought at $10 with an initial 25% stop-loss set at $7.50, the trailing-stop would rise if the price of the asset continued to rise above $10.
Trailing stop losses are essential in today’s trading environment.
Let’s say you bought shares of Canopy Growth (CGC) in April 2019 around $42 a share. As it pushed to $52a share weeks later, you begin to get nervous the run is about to come to an end. To protect your portfolio with a trailing stop, you can use a 10% trailing stop for example. In this case, you’d set your stop at $46.80 (or 10% of $52 = $5.20 subtracted from $52).
This way, should CGC pull back 10%, you can still lock in a gain of $4.80.
And if the stock continues to head north, nothing happens. The trailing stop-loss isn’t triggered. However, if the stock turns south and hits that trailing stop-loss, the stock is sold — and you pocket the profit.
It’s a safe, easy strategy that should be part of all portfolios.