In outlining your money management rules in order to start trading, the first step should be deciding on your trading float. This is the amount of money you’ve got to trade with. Before you set the exact amount, it is important to outline your objectives in trading.
You need to be clear on the amount of time you have available to spend trading. Are you able to trade full time, part-time, or have you got hardly any time to trade, maybe because of work and family commitments. Next, work out how much capital you’ve got to trade with. There will of course be times when you will experience a loss. Are you ok with a loss of 30%, forty percent?
What annual rate of return do you want? You need to be realistic about this. How much profit do you want to make over what period of time? This amount will be dependent on the amount of risk you are prepared to take. How do you want to take your money from the market? Do you want a cash flow (that is, consistently taking profits out) or capital growth (by growing your capital in the market, using the wonder of compound interest)?
Remember that money made of trading is not a trusty source of income. Some months, yes, you’ll make a reasonable profit, even perhaps a high profit but at different times you need to accept that there’ll be a lot of losses. It’s a sensible idea for the 1st two years of trading not to target your return on investment. Rather, concentrate on refining your trading system and developing good trading habits. You’ll in this manner be putting in the ground work for future trading success. There are tools out there that will help you. Knowing what is Metastock can be useful to your trading.
The bigger the trading float you start with, the easier it will be for you to trade. This is because there are certain fixed costs involved in trading. The biggest cost is brokerage. Many brokers charge a fixed fee for every trade and the traders with the larger fund size will find this easier to cope with.
Let us say two traders open a trade each. One trader’s position is valued at $2000 and the second trader’s position is worth $20,000. Both traders have identical brokerage charges which are $100 per trade. The trader with the bigger account size has an edge over the other, as he only has to make 0.5% to break even. The other has to make five pc before he breaks even. It is imperative therefore that the trader with the littler position be more successful, which places him under bigger stress.
There’s of course no problem with starting with a smaller float, but you will be at a larger disadvantage than someone with a sizeable amount.
To start defining your money management rules, think about the objectives you are aiming at in trading. When you’ve crystallized these objectives, you will be in a position to think about the dimensions of the float you are going to operate with. This is a key facet of your money management rules and should be given due consideration before you start trading. Desire to get started on the right trading trail? Look for a Metastock download so that you can become familiar with one of the best tools of the trade.