Which is the most important tool in investment? This is a question that often every investor asks. No doubt, good money management is the best and competent tool in profitable trading. Those who possess a sound professional money management technique would win the game. So investors should give good emphasis to learn money management, and it should be before the beginning of the trade.
The first step to become a good money manager is to make a business plan or a trading plan. For this, make an outline and structure of trading and fund allocation. In a trading plan we should consider and track prediction of price and find out the point to buy or sell.
The second step is the risk management technique. In fund allocation, dumping big amounts of money in to a single contract is not considered a professional method. The business plan should be fool proof and tested. For testing a business plan, we can follow the paper trading using associated software.
Keen observation and timing is another essential factor for protecting the hard earned money and making earning from the future trading. Experience is the best teacher in trading, which has no substitutes. One cannot find a good trade selection from the books. Books are useful only for guiding the person who is learning to trade. During the initial stages, the trader would face numerous hurdles. To overcome these obstacles, books could be made use of.
Back test is another method, which could be adopted to improve the trading experience. In this case, we can understand the price variations according to the different situations. It would test the accuracy of the tool we used with respect to past trades, and helps to gain experience.
It is important to wait for the right opportunity in trading. Hurry should be avoided. The circumstances and future chances should be studied. In the case of long-term future investment, the future prospects and money value should also be considered.
In money management, the following should also be considered:
- Diversification of portfolio - Do not put all eggs in one basket.
- Know the commodity, value of underlying asset
- Proportional fund allocation
- Risk to reward ratio - Amount of risk should never be greater than the reward.
- Stop loss to protect from excessive losses and make money management technique flawless.
- Always do your analysis before trading.
- Always have a clear and reasonable idea of your objective.
- Never trade on emotions or other people's forecasts.
- Buy at support and sell at resistance.
- Always trade with "STOP LOSS".
- Never hold a losing position over night.
- Never add to a losing position.
- Never risk more than 5 per cent of your trading capital on one trade.
- Take responsibility for your own trades.
- If you are breaking any of the above rules STOP TRADING because you are out of control.
It is not advisable that you try to become the jack of all markets as you might end up in becoming the master of none.
Making rules for future trading under the light of experience is the next step for professional trade. These rules will help in trading. Whenever a doubt arises in the performance under any circumstances they will give the direction and provide right path towards the target.
Following are some of the commonly practiced rules in trading:
10 GOLDEN RULES FOR TRADING
Biju Thomas is Head, Commodity Online Research. He can be contacted at research@commodityonline.com
