Money Management: The Key To Survival
by ilene - August 4th, 2009 11:37 pm
Excellent Money Management Advice, via Karl Denninger at The Market Ticker
Money Management: The Key To Survival
Many people have had some horrifying punishment meted out to their accounts the last couple of months (and especially in the last month), just like many did in late 2008 and early 2009 (on the other side of the trade.)
This is what happens when you don’t use sound money management:
As you know, during the crash of 2008 I was away from trading due to an accident and I was fortunate to have someone like Atilla to take care of my account which was worth about 350K at the end of August 08.
Market crashed and the person I trusted my account when I was away turned out to be one of the very few in financial world who called and traded the crash of 2008 timely. Later when I reviewed my statements I saw ES and option trades that made more than 70 points in less than 20 minutes on September 30 or October 1.
When I was back, I had an account worth near 4M and I decided to open a restaurant in NYC. I quickly found out that even Manhattan wasn’t immune from financial tsunami, so I was back to trading. With a larger than ever account. With a gross confidence, with a pride to be in the other class. A new player in a new game. However learning process became expensive.
When I switched from short term to intermediate term trading, I thought the only thing that matters is time frame. No I was wrong. This was completely a new game.
Yesterday was the day I could not hold on to my mistakes. I called the person who made me millions during the crash, who I tried to follow after the crash.
That’s $350,000 -> $4,000,000 -> $0
Look, we all take losses as traders. I don’t care how right you are today, some day you will be wrong. Badly wrong.
Leverage + too big of a bet + failure to segregate speculative accounts from core capital = you will eventually die.
Every time.
Not some times.
Every time.
Jesse Livermore blew himself up more than once, failing to protect fortunes he made trading that reached as high as $100 million during…
The Three Phases of a Trader’s Education: Psychology, Money Management, Method
by ilene - July 23rd, 2009 6:09 pm
The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. Elliott Wave International is offering a special 45-page Best Of Trader’s Classroom eBook, free.
The Three Phases of a Trader’s Education: Psychology, Money Management, Method
By Jeffrey Kennedy, courtesy of Elliott Wave International
Aspiring traders typically go through three phases in this order:
Methodology. The first phase is that all-too-familiar quest for the Holy Grail – a trading system that never fails. After spending thousands of dollars on books, seminars and trading systems, the aspiring trader eventually realizes that no such system exists.
Money Management. So, after getting frustrated with wasting time and money, the up-and-coming trader begins to understand the need for money management, risking only a small percentage of a portfolio on a given trade versus too large a bet.
Psychology. The third phase is realizing how important psychology is – not only personal psychology but also the psychology of crowds.
But it would be better to go through these phases in the opposite direction. I actually read of this idea in a magazine a few months ago but, for the life of me, can’t find the article. Even so, with a measly 15 years of experience under my belt and an expensive Ph.D. from S.H.K. University (i.e., School of Hard Knocks), I wholeheartedly agree. Aspiring traders should begin their journey at phase three and work backward.
I believe the first step in becoming a consistently successful trader is to understand how psychology plays out in your own make-up and in the way the crowd reacts to changes in the markets. The reason for this is that a trader must realize that once he or she makes a trade, logic no longer applies. This is because the emotions of fear and greed take precedence – fear of losing money and greed for more money.
Once the aspiring trader understands this psychology, it’s easier to understand why it’s important to have a defined investment methodology and, more importantly, the discipline to follow it. New traders must realize that once they join a crowd, they lose their individuality. Worse yet, crowd psychology impairs their judgment, because crowds are wrong more often than not, typically selling at market bottoms and buying at market tops.
Moving onto phase two, after the aspiring trader understands a bit of psychology, he or she can focus on money management. Money…