Module 11 – Money Management and Computers

Introduction

Money management may be the most important skill you can learn for successful trading. How you view your trading account and how you determine how much to use on each trade is crucial to making a profit at trading. If you run out of money, then you won’t be trading anymore, and anything else you know or learn about trading will be wasted.

With the power of computers still multiplying year-by-year, it’s no wonder they have plenty to offer you when it comes to analyzing and picking stocks or securities. But the computer is just a tool, and you need to know how to use it and interpret the results. Some people are still convinced that they can buy some software, plug it in, and walk away leaving it to trade and make a profit. Unfortunately, such systems sometimes have success for a time which attracts the next generation of buyers. It’s far better to use the power of the computer to enable improved analysis, and using this you can make informed decisions year after year.

Money Management

Money management refers to how you allocate your money to different trades. How much will you put in to your latest stock discovery? Many trading courses concentrate on how to determine the best entry and exit positions, and give less importance to how much to put into the trade, but it’s estimated that money management accounts for 30% of your results. The same estimate says that entry and exit selections account for only 10%, and the other 60% comes from the psychology of trading, so we will certainly be covering that here.

You may hear the term ‘position sizing’, which refers to how much money you put into the market on a particular trade. When it comes to the calculation side of money management this is a fundamental first computation, and it springs from your analysis of where you think the stock price may be going, and where you fear the stock price may be going. This is the reward versus risk calculation.

The other side to the hard facts and figures of money management is the mental one. No one is immune to this, and it’s often characterized as the fear and greed aspect of trading. It’s this which causes most difficulty for many novice traders, and overcoming it is essential.

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