In the past, there are some people who ask why do we need to cut loss? Why can’t we just hold and wait?
There are numerous books on how to read charts but not many state the importance of the money management in trading.
Thus we would like to highlight one of the famous trading rules that professionals are following to ensure they can survive in the market for long time.
Rules of this money management system
1) We take profit once 3.5% up
2) We cut loss once 3% down
We do not expect huge profit but just a 3.5% gain would be enough which can be easily achieved.
Assume we do 10 trades /month and our technical analysis/luck really poor thus we managed to get only 60% of our trades correct.
If you are getting 50% or lower, we would encourage to take the money and go Genting instead since the possibility of win/lose is the same.
Based the calculation above, we would have made 4% per month.
But people might ask, “What can a mere 4% do for me”?
Assume that you started off with a 50K capital.
At the end of 2 years, you would have increase your capital from 50 K to 128K
That means you have capital gain of 78K (256%) and extra income of 3.25K every month.
In reality, pros earn more than that as they choose to cut loss fast and let their profit runs.
Finally some people might say “I have no time to trade so many times per month” or “I do not have so much capital”.
We are not asking people to follow strictly to the above rules but rather put in the numbers and do some self calculation.
A good money management system is more important than any fundamental or technical analysis though many choose to ignore this important factor in trading.
If you currently do not have one now, we would strongly urge to set one soon!!
Don’t follow me. I don’t have stop-loss strategy but use different risk control and money management. Stop-loss is just one of the methods in money managment and risk control.
http://createwealth8888.blogspot.com/2009/10/portfolio-management-stop-losses.html