Managing money

Here are some quotes of some famous traders and investors:

• «I never met a rich technology» - Jim Rogers.

• «I always laugh over people who say,« I have never met a rich technique », I like it! It is arrogant, nonsensical response. I used the fundamental analysis for 9 years, and prospered as a technical player »- Mary Schwartz.

• «diversify their investments» - John Templeton.

• «Diversification is insurance against ignorance» - William O'Neill.

• «Do not try to buy at the base» - Peter Lynch.

• «Do not try to buy or sell at the base of the top» - Bernard Baruch

• «Perhaps, the trend is your friend, and within a few minutes in Chicago, but basically, this is rarely a way to become rich» - Jim Rogers.

• «I am confident that the biggest money in the market made a turn. Everyone said that you fail, try to choose the tops and bases, and you make all your money by playing on the trend in the middle. Well, for a period of twelve years, I skip the profit in the middle, but I made a lot of money at tops and bases ». - Paul Tudor Jones.
So, here we have a group of people who collectively earn billions of dollars trading on the market, and they can not agree on how to make money. Not one. So, what do we do? Is there anything in what they do agree? Only one:

• «My main advice - do not waste your money» - Jim Rogers.

• «I'm more concerned about the management of losses. Learn to take losses. The most important thing when trading in the market is to not let your losses get out of control ». - Mary Schwartz.

• «I always think about the loss of money as opposed to thinking about making money. Do not concentrate on making money, concentrate on protecting what you have »- Paul Tudor Jones.

• «Rule number one investment - never lose money. Rule number two - never forget rule number one »- Warren Buffett.

Indeed there are many ways to make money in the market. There are thousands of workshops for which you can pay, and where the lecturer will tell you how he made $ 1 billion on the stock exchange. In the same place you will be able to book his sister «How do I double my money every hour», which is available in various forms, for only $ 29.95. All they tell you about some of the models who will work at one time and not in another. Some of you may go a long way from Jimmy Rogers, while others will do so with Bernard Baruch, but the most critical component of making money on the market - do not lose much. You should always make a stop-order and lose only a part. You should not lose too much, because tomorrow you will not earn a penny, if all of a sudden bust today.

One of the most common errors committed by the trader - is the risk of all capital. There is no faster way to bust than to do so. Studies that have been made about this, suggest the risk of a transaction, not more than 2% of the commercial capital. A majority of professionals will tell you that this is too many, and they run the risk of 1 / 4% to 1% of each transaction. The idea is that no transaction should not affect at all your capital and your entire trade. You do not want to become rich in this case, but you also do not find the need to sell your house, as has so often happened with other people.

Another advantage of small positions is that they allow you to be free from anxiety. If you risk a rather small number, you will not be «shake». You also will not be in a position where you say «Stop, I can not lose so much money», and makes you a bad deal in terrible investment. Thus, if you're serious about this, if you want to trade on long-term basis, you will practice prudent management of money. Before you enter into the market, the first thing about which you need to ask ourselves is - How much do I risk in this transaction. Remember that we are here to make money, but we can not do anything unless we bust.

The key to survival lies in the fact that you have to respect the risk, take a small position, which does not allow you to burn. You should always bear in mind that in the trade, you only play at the possibilities. You can have a model that works correctly in 75% of cases, but each transaction - this is a separate case. It does not take into account the most recent transaction. If you have 75% of th system, you can still be wrong 10 times in a row, and if you sell any amount of time it will happen sooner or later.

I once thought he found a reliable way to make money at roulette. I played on the black and red. I would be sitting at the table and after the ball fell to the black or red 5 times in a row, I began to put on the opposite color (for example, if it were a row of five red, I started to bet on black). Then, if I was wrong, I would go further and doubles. This means that if I started with $ 1, the next time I would put $ 2, then 4 $, then $ 8, $ 16, etc. Ultimately, I would have won, and won $ 1. Then I was 13 years old, and I really thought he found the «Holy Grail chalice». If it was so easy to find the 13-year-old boy, then why all the casinos are not destroyed, but all the players do not become millionaires. Because it's not working.

If we toss a coin, every time we have 50% of the first chance that get the eagle, as well as tails. But each throw is independent of the previous one. The subsequent throw a coin has nothing to do with made before. This is a pure accident. There is some chance that rolled in the eagle series of throws, or tails. But which of the shots - it is pure coincidence. Every time you toss a coin, this is one of the billions of tossing a coin tossing. That's why you can fall 100 consecutive eagles, if you toss a coin long enough.

That is why for the first time I played roulette, black has fallen 19 times in a row, and I went home a loser.
Trade the same. We have a certain percentage of our transactions, which will be good, and some percentage that will fail. But you follow the deal has nothing to do with the previous one. Thus, even if you have the most accurate method in the world, over time you destroy, if you do not practice good money management and control of risk.

So, now that we all understand why money management and control of risk are very important, let us explain how exactly to apply these rules to your trading. As I said before, you should not ever risk more than 2% of your world accounts in one transaction. But, as I said, for most people this is too much, and I belong to this group most people. I like to keep your risk within approximately 1%. So let me draw your attention to the risk of 1% of your trading account. For the purposes of this example let's assume that you have a very average size of the account - $ 25,000:

Let's say you have seen tonight and the graphics market ran to a timetable XYZ, which looks like this, it could be a big deal at the oscillation, when buying at a price of 15 3 / 16. At least the previous day at 14 1 / 2. This means that you place your stop-order to 14 7 / 16, the risk of 3 / 4 points on the deal. Taking $ 25,000 as a trading account, you can lose up to $ 250 in one transaction. You will use this value to determine how many lots or contracts you can buy. Assume that your number of contracts is up to 333 contracts. Most people do not like to do odd lots, so it is possible to round down to 300. Do not round up, because in this case you exceed the allowable level of risk.

Let me offer you a few quotations about the control of risk:

• «If you have an approach that allows you to make money, then money management can make the difference between success and failure. I try to be conservative in its risk management. I want to be sure that I will be in the game tomorrow. Risk control is essential ». - Monroe Trout

• «If you're represents a loss, then you can not sell». - Bruce Kovner

• «The best traders have no ego. You should swallow their pride and go out of the losses ». - Tom Baldwin

• «Never risk more than 1% of your total assets in any transaction. Risk of 1%, I am indifferent to any particular transaction. Permanent preservation of the risk at low levels is absolutely necessary ». - Larry Haytham.
While all of these traders have different techniques to make money, each of them agrees that control of risk is the single most important aspect of trade. These traders are the best in the world and the only thing on which they agree - it is control of risk. Think about it.

Brandon Frederikson
www.hardrightedge.com