Stock Money Management Styles and Methods in Stocks

The best way to practice successful money management in Stocks is for a investor to keep losses lower than the profits they make. This is called risk:reward ratio.

High Reward to Risk Ratio

This technique is used to increase the profitability of an investment strategy by trading only when you have the potential to make more than Three times more than what you are risking.

If you invest using a high risk reward ratio of 3:1 or more, you significantly increase your chances of becoming profitable in the long run. Trading Chart below shows you how:

In the first example, you can see that even if you only won 50 percent of your trade transactions in your account, you would still make a profit of $10,000.

Even if your win rate went lower to about 30% you would still end up profitable - Account Management Principle - Money Management.

Just remember that whenever you have a good risk to reward ratio, your chances of being profitable as a trader are much greater even if you have a lower win percentage for your strategy.

Never use a risk : reward ratio where you can lose more pips one trade than you plan to make. It does not make sense to risk 1,000 dollars in order to make only 100 dollars.

Because you have to win 10 times so as to make the $1,000 dollars back. If you ONLY lose once you've to give back all your profits.

This type of investment strategy makes no sense and you'll lose on the long term.

Percentage Method

The percent risk method is a technique where you risk the same percentage of your account balance per transaction - Account Management Methods.

Percent risk based method says that there will be a certain percentage of your account equity balance that is at risk per trade. To calculate the percent risk per each trade transaction, you need to know 2 things, the percentage risk that you've chosen and lot size of an open order so as to calculate where to put the stop loss order. Since the percent is known, we shall use it to calculate the lot size of the trade order to be placed in the market, this is known as position size.

Example

If you have an account balance of $50,000 in your account and risk percent is 2%

Then 2 % is equal to $1,000

Other factors to consider include:

• Max Number of Open Trade Positions

A final point to consider is the maximum number of open trade positions that is the maximum number of stock trades that you want to be in at any one given time. This is another factor to decide when managing account capital.

If for example, you chose a 2 %, you might also say chose to be in a maximum of 5 trade positions at any one given time. If you open 4 trade positions and all 4 of those positions close at a loss on the same day, then you would have an 8% decrease in your account balances that day.

• Invest Sufficient Capital

One of the worst mistakes that traders can make in stocks is attempting to open a account without sufficient capital.

The trader with limited capital will be a worried trader, always looking to minimize losses beyond the point of realistic trading, but will also be oftenly taken out of the trades before realizing any success out of their strategy.

• Exercise Discipline

Discipline is most important thing that a trader can master to so as to become profitable. Discipline is ability to plan your work & work your plan.

It is the ability to give a trade the time to develop without hastily taking yourself out of the market simply because you are uncomfortable with risk. Discipline is also the ability to continue to stick to your stocks plan even after you have suffered losses. Do your best to cultivate the level of discipline that is required so as to be profitable.

Managing Account Capital Basics

Stocks money management, is the foundation of any system as it helps investors to improve their chances to get profit trading on the market. It is especially important when transacting in the leveraged market, which is considered to probably be among one of the more liquid financial markets but also at the same time to be also one of the riskiest.

If you want to invest successfully in the market you should realize that it's very important to have an effective strategy of money management because you will be using leverage to place your orders - Account Management Basics.

The difference between average profits and losses should be strictly calculated, the profits on average should be more than the losses on average when trading, otherwise will not yield any profits. In this case an investor has to formulate their own account management rules, the success of each trader depends on their individual traits. Therefore, every makes his own strategy & formulates their own money management guidelines based on the above guidelines.

When you're placing your orders put your stop loss orders in order to avoid huge losses. Stop loss orders can also be used to lock in profit.

Consider the chance to get profit against chance to get loss as 3:1 - this risk: reward ratio should be favorable more on the profit side.

Considering these rules and guidelines, you can use them to improve profitability of your strategy & try to create your own strategy that will possibly give you good profits when trading with it.