Five. Money Management
Management of capital and adequate risk assessment, key moments in any professional trader. The criteria according to which the expert builds its activities, immutable, that is why his work is successful. We invite you to consider some theoretical principles of management specialist equity.
Held as a trader - learn what it means at all costs to preserve your capital. A practical goal of every trader is to earn money. It is unlikely that someone is engaged only for the pleasure! And if you strive to maintain the existing capital, it will encourage you to reduce costs and thus increase revenue.
Succumbing to the desire to earn as much money, many new entrants evaluate trading only in terms of how much revenue they will receive if they will be successful. And, unfortunately, very few people given more pressing question, namely: "What are the losses I incurred in connection with a particular operation?" The math is simple: a pair of deals with failure with the potential loss of half of the capital guaranteed bankruptcy. However, choosing between potential gains and losses from the savings of capital, often decided in favor of the first option. This approach may be good for one-time action, but the reliance on long-term results should be based on a clear strategy based on the following points:
A. Capital depends on any change in percentage, so the more it becomes your investment portfolio or bank account, the stronger effort on the movement of capital percentage down.
Two. Offsetting losses, you will have to pay much higher interest income. For example, start-up capital was $ 100 thousand. Three years in a row you have made a profit of 20% per year. So, after this period your account will accumulate 172,800 dollars. Assume the following year hit your capital losses of 45 interest. Thus, the account will be only 95,040 dollars, that is, less than the amount with which you started. This is because the percentage loss is calculated from the amount of seed capital and profits.
For effective management of capital, such information is useful: 100% of profits are spent to cover the 50-percent loss and 33% loss requires a 49% profit.
To the best of experienced traders may argue that the market for several years may be adjusted within 10%. It is worth remembering that history knows, and greater correction of the index. This rate in 1973-1974. from Standard & Poor's 500 was 44%., and then many traders have suffered a loss of 70-80%.
Luck comes to those who are in trouble with the math. The aggressive policy, which assumes a large profit is almost always doomed to failure if the trader does not control the risk or operation is not based on money management.
A. Diversification - a strategy of investment allocation
Two. Psychology of control loss
