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I have been thinking a lot about things some of you (mostly gambler) have discussed about stock trading and money management. I think it is a system that I should really start to employ, even though I have been able to turn a $1700 IRA balance into $45,000 over a period of a few years. I guess it is rather fortunate that I did not lose the whole amount, because there have been several times where I was "all in" with a particular stock (although never in options until this last trade, and I was not all in for that...but certainly in more than I should have been). In my slight defense, I did pick stocks with very sound fundamentals (large cash reserver, little debt, low pe) and I traded them at times where I felt they were going to go low to high. If I was wrong, I just held the stock, sometimes for many months, until the investment turned positive (now I see many of you covering your face with your palm). For example, a past investment was Exxon at $62 when I just *knew* it couldn't go lower and was due for a run up. It then proceeded to drop below $60 and stayed there for quite awhile. I held it until it hit $66 and sold it, instead of cutting my loss at $59 or whatever. I don't know what you call this type of trading, or if it even has a name? (Haphazard Swing Trading With a Dash of Buy and Hold)
Anyway, it seems like a better strategy is to employ one of the money management schemes where you establish an amount you are willing to lose (say 2% of your investment capital) and then place a trade with a stop limit such that the maximum loss is only 2%. This makes sense in theory, but with a small amount of money to invest, it seems hard.
Let me give an example. Say I have 20,000 to invest in a stock. I can accept a loss of 2%, or $400, on my investment. So I buy 200 shares of xyz corp at $100 each and put a stop limit of $98 on my trade. Now if the stock dips below $98, my shares are sold and I am left with $19600. On the other hand, if the shares go up, then I must pick an exit point. If I am to assume that half of my guesses are correct and half are wrong, then I would need to exit at no lower than $102 plus 4x commision fees just to break even on my trading. Obviously I want to let the stock run up a bit, so I pay for my losing trades, commisions on losers and winners, and still make some cash. I guess it is this part where I am fuzzy. Do I base my exit point on a case by case basis or do I say I will always exit a trade at 4% increase, or 8% increase, or maybe I re-adjust my stop loss after the trade has crossed each 4% mark such that I am always guaranteed a winner after 4% runup but can still benefit if a stock continues to run 30% or more. Actually this doesn't sound too bad at all.
With the limited capital that I am willing to risk with this type of strategy, it will still be a pretty slow way of trading if a stock decides to languish between the stop loss and the exit point for many days. I guess an adendum to my money management strategy would be a way to exit if xx days have past and move on to another stock trade.
Tips?
Anyway, it seems like a better strategy is to employ one of the money management schemes where you establish an amount you are willing to lose (say 2% of your investment capital) and then place a trade with a stop limit such that the maximum loss is only 2%. This makes sense in theory, but with a small amount of money to invest, it seems hard.
Let me give an example. Say I have 20,000 to invest in a stock. I can accept a loss of 2%, or $400, on my investment. So I buy 200 shares of xyz corp at $100 each and put a stop limit of $98 on my trade. Now if the stock dips below $98, my shares are sold and I am left with $19600. On the other hand, if the shares go up, then I must pick an exit point. If I am to assume that half of my guesses are correct and half are wrong, then I would need to exit at no lower than $102 plus 4x commision fees just to break even on my trading. Obviously I want to let the stock run up a bit, so I pay for my losing trades, commisions on losers and winners, and still make some cash. I guess it is this part where I am fuzzy. Do I base my exit point on a case by case basis or do I say I will always exit a trade at 4% increase, or 8% increase, or maybe I re-adjust my stop loss after the trade has crossed each 4% mark such that I am always guaranteed a winner after 4% runup but can still benefit if a stock continues to run 30% or more. Actually this doesn't sound too bad at all.
With the limited capital that I am willing to risk with this type of strategy, it will still be a pretty slow way of trading if a stock decides to languish between the stop loss and the exit point for many days. I guess an adendum to my money management strategy would be a way to exit if xx days have past and move on to another stock trade.
Tips?
) and keep a small amount as my play money to continue my tech swing trades. Each year I will dump 10% of my profits from my swing trades into this mutual fund (which will also be in the IRA so tax exempt) and if I ever get in a situation where my investment goes to zero, then I will stop trading and let the fund do it's thing. I'll start it off by putting $32.4K into the fund and keeping the other for my play money.
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