Tuesday, February 15, 2011

Money management skills

These days, I tend to focus on the planning part of executing a trade. I'm no longer the trigger happy person I was when I first started in the market. I guess it's no longer exciting to me, and I don't have such a high expectations of it, so the stress is no longer there. I used to think of wanting to get a few hundreds every week from trading. I think all these targets are making it hard to think properly and you always want to do some action instead of patiently waiting out. I removed all such targets from hence on.

Besides learning about the technicalities of a trading system, I think the more important part is learning how to manage your money. You must have heard a lot of people saying about money management and all, but what does it really mean? To me, these are the key elements:

1. The amount of capital allocated to each position

2. The risk/reward, the cut loss and take profit point for each position

I find that over time, there's nothing new I want to add to my trading system. It works fine for me, both financially and psychologically, so I know that is the correct trading system for me. The only thing I want to keep on improving would be on my money management skills. Money management is really about allocating a limited resource (money) to where it's treated best.

It's interesting that only after the bulk of my free cash is spent on my highly expensive flat, and that I've really limited resources to trade, that I actually spent a lot more effort looking for the best bang for my buck. You can even call me a reluctant trader, in the sense that if certain conditions are not right, I would not even look at it. If it hits the right conditions, I'll reluctantly put in a small position to test it out. If it hits another lower point and the conditions are right again, I'll enter reluctantly again. This mindset of sieving out what's wrong about a trading position is new to me. I think in the past, I'm looking for what's right about the trade, and there are lots of reasons to enter something. You see what your mind wants to see.

So in the middle of a trade, I might want to free up my resources tied up in a position to have cash, not because the trade has run its course, but rather I saw a more attractive potential position coming up. I'm arguing with myself whether the extra bids I can get from waiting out the full potential of the position I'm already in is worth the wait and therefore the risk. It's the opportunity cost of holding a position and locking up your capital, especially so if the position is profitable. That is, again, new to me because I used to have the resources to do up to a few trades at one time, but now I'm reduced to maybe 2? So, in a good way, I'm being forced to evaluate all my positions to get the best out of my portfolio, instead of an individual trade.

That, I think, is the epiphany that struck me when I was browsing through my charts late at night.


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