Money Management

Money management is a critical part of any successful trading strategy and one area that is easily over looked. In essence, there are three basic calculations that you should be making prior to entering a trade and should form part of your trading plan.

1. How much of your total portfolio will be used to enter a trade. For the purchase of regular blue chip shares, I would suggest between 10-20% no more. If trading CFDs Options etc, you may want to lower this figure to 5-10%

2. What is that maximum you are prepared to loose on this trade, if it goes bad? This is where your stop loss will be used. I would recommend not risking any more than 10-15% of the amount that you have invested.

3. If you were to get stopped out; how much of your total portfolio would you loose?

For example if you have $10,000 in your trading account. You use $2000 to enter a trade (20%), you set a stop loss 10% below your buy price. The maximum that you could loose would be $200 or 2% of your total account which is acceptable. It is best to keep this figure within 1 to 3%.

Roy Masters is a technical writer and Chief Analyst for www.masterfultrading.com.

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