Seven Time-Tested Money Management Rules to Insure Survival over the Long Run
Articles Library | Money Management Articles | Written by Robert Colby |
Seven Time-Tested Money Management Rules to Insure Survival over the Long Run
1. Always Preserve Capital. Traders should limit loss to 1% of total capital for any one position.
2. Always trade in the direction of the larger trends, with the most emphasis on the Primary Tide that lasts many months or years. In a Bull Market, look only for opportunities to enter long and close long. In a Bear Market, look only for opportunities to enter short and close short.
3. Always use Actual Stops. Short-term traders should limit losses to a maximum 2% for each position. Longer-term traders and investors should limit losses to 7.2% on the long side and 8.4% on the short side for each position. (See my book, Swing Filter, pages 680-681, and Cycles, pages 178-179.)
4. Always exit losing positions before the close of the day for short-term Ripple traders (with a time horizon measured in days). Longer-term traders should also set a time stop appropriate to the cycle they are trying to capture, in order to avoid tying up capital in positions that are not moving as expected. (See my book, Cycles of Time and Price, pages 176-188.)
5. Always consider Bet Size and Diversification. Commit a maximum of 5% of total capital to any one position.
6. Always calculate your Reward/Risk Ratio. Enter a position only when your analysis indicates 3 points of potential reward for 1 point of risk.
7. Always take a time out from trading any time you lose 5% of your capital. This breaks bad momentum and limits negative spirals into deep holes. It gives us time to calmly reevaluate the situation. A few days off helps clear the head. A time out helps limit revenge trading. The desperate attempt to quickly make back the loss most often causes even more trouble.
Capital conservation should be the first rule in trading and investing. Capital takes time to accumulate, but it can disappear fast if the technical trading rules are not well known and respected. Beginners particularly would be well advised to take these rules to heart and to start trading only a small fraction of their capital using the minimum size orders until they acquire their real-time market education as inexpensively as possible. Ignore this, and the tuition could be substantial.
Seven Time-Tested Money Management Rules to Insure Survival over the Long Run
1. Always Preserve Capital. Traders should limit loss to 1% of total capital for any one position.
2. Always trade in the direction of the larger trends, with the most emphasis on the Primary Tide that lasts many months or years. In a Bull Market, look only for opportunities to enter long and close long. In a Bear Market, look only for opportunities to enter short and close short.
3. Always use Actual Stops. Short-term traders should limit losses to a maximum 2% for each position. Longer-term traders and investors should limit losses to 7.2% on the long side and 8.4% on the short side for each position. (See my book, Swing Filter, pages 680-681, and Cycles, pages 178-179.)
4. Always exit losing positions before the close of the day for short-term Ripple traders (with a time horizon measured in days). Longer-term traders should also set a time stop appropriate to the cycle they are trying to capture, in order to avoid tying up capital in positions that are not moving as expected. (See my book, Cycles of Time and Price, pages 176-188.)
5. Always consider Bet Size and Diversification. Commit a maximum of 5% of total capital to any one position.
6. Always calculate your Reward/Risk Ratio. Enter a position only when your analysis indicates 3 points of potential reward for 1 point of risk.
7. Always take a time out from trading any time you lose 5% of your capital. This breaks bad momentum and limits negative spirals into deep holes. It gives us time to calmly reevaluate the situation. A few days off helps clear the head. A time out helps limit revenge trading. The desperate attempt to quickly make back the loss most often causes even more trouble.
Capital conservation should be the first rule in trading and investing. Capital takes time to accumulate, but it can disappear fast if the technical trading rules are not well known and respected. Beginners particularly would be well advised to take these rules to heart and to start trading only a small fraction of their capital using the minimum size orders until they acquire their real-time market education as inexpensively as possible. Ignore this, and the tuition could be substantial.
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