There’s a lot to learn when it comes to stock trading, and one of the essential foundations of every trading strategy is a good money management plan. Picking the right stocks and developing an investment strategy is important, but if you’re not managing your risk and your bankroll too, you’ll find yourself in hot water pretty quickly. These tips should help you manage your bankroll and your risk when investing in stocks.
One thing that’s important to note, first and foremost, is that there is no single right way to manage your money. There are multiple strategies that can work. Managing your bankroll successfully is more a matter of choosing a proven strategy and being disciplined about applying it.
It’s also important to keep in mind that you can’t control the market, and you can’t control how other people will react to it. The only things you can control are your own money, and the level of risk you assume with each investment and trade that you make. Because there are so many variables involved in playing the stock market, it’s important to keep a tight hold on those few things that you can control.
Finally, understand what money management is all about: it’s not about winning every time. Nobody can do that. The key is limiting your losses on those occasions where you make an unsuccessful trade.
In business, trading, and other financial matters, risk management is a key concept. Risk management realises that loss is unavoidable, and that the best way to proceed is not to try and avoid loss altogether, but to manage your level of risk so that when you do lose, it’s not an insurmountable loss.
In stock trading, the 2% rule is simple: never risk more than 2% of your capital on any single trade. For instance, if you have £10,000 in capital, sticking to the 2% rule means you’ll never risk more than £200 at a time.
The 2% rule can be applied using a simple technique called position sizing. Here, you take into account factors such as the price of the stock you want to buy, and the size of your 2% investment, to calculate how many shares you’ll buy and at what point you need to sell to minimise your losses.
For this example, let’s say your stock is currently trading at £10. You decide that your stop—the point at which you pull your money out of the stock—will be at £9. This means you’re risking £1 per share. With £10,000 in capital, your 2% limit is £200, meaning you can buy a maximum of 200 shares. However, remember that you must take into account commissions and slippage, so it’s a good idea to buy slightly under your maximum to stay within the 2% rule.
Yes! That may sound counter-intuitive, given that following a sound money management strategy is such an important part of successful trading. However, while the 2% rule is a good one to follow for those who are new to trading, as you get more experience under your belt, there’s no reason why you can’t learn about other strategies and try them out too. There’s no one-size-fits-all management strategy that works for everyone, and there is often a lot to be gained from thinking outside the box.
