Day-Trading Money Management and How it Effects Your Psychology

Day-Trading Money Management and How it Effects Your Psychology

Money management is very import in Day-Trading. Warren Buffet’s golden rule was to protect your capital and this must be followed in Day-Trading.

To protect your trading capital or trading bank in Day-Trading the use of a stop-loss is normally used.

It is important to have a profit target as well. This means that you have a pre-determined maximum loss as well as a preset profit level.

Dave a Professional E minis Day-Trader believes that it is vital to have at least a two to one profit to loss ratio. That is that your profit target is at least twice what your stop loss is.

This is important because if your profit target and stop loss are the same, it means that you need to be getting it right at least 70% of the time to be making any money. However if you have a two to one ratio, even if you are only getting it right 50% of the time you are still making heaps of money.

More importantly by having this two to one ratio it makes it very difficult to lose money. You need to be getting it wrong more than 70% of the time to start losing money.

Another important part of money management is to be able to start off Day-Trading with a small amount of money. When first learning it is likely that you will make mistakes, so it is better to make a mistake with a little bit of money rather than a lot. If you make a mistake with a small amount of money you are likely to continue, however if you make a mistake with a large amount of money typically you will feel a lot of pain and therefore stop trading, never learning from your mistake.

When I first started trading I was using a strategy called credit put spreads. I was doing very well for about a year, right until Hurricane Katrina. In the two days following Hurricane Katrina I lost $80,000 which was all of what I had made the previous year, and then some!

After this experience it took me over a year before I could place a trade again.

If I had learnt the same lesson by only losing a few thousand dollars I would have been able to get back into trading a lot faster.

Because, is losing a few thousand dollars the end of the world? Most people would say no. Is losing $80,000 the end of the world? Some people would say yes and some people would say no, I can tell you it is not the end of the world, but you can see it from there!

Also when you are first learning to Day-Trade or any trading, by starting with a small amount of money it takes the pressure of trading. The psychology or mindset is the most important part of trading.

If you start off with a large amount of money, an amount that will cause you a lot of … Read More

Living Too Close To The Bone

Living Too Close To The Bone

In the western world, most of us choose to live close to the bone. Note that I stress “choose.”

In my early twenties, I achieved very rapid success in my career, being promoted several times in less than five years. I went from slightly more than minimum wage to a salary that would, in today’s dollars, be roughly $105,000 per year. My wife went from being a typical starving student to a registered nurse, earning (again, in today’s dollars) roughly $75,000. I also started a new business, determined to make my fortune quickly.

From living in a rooming house, I acquired a new home, new truck, new car, new RV and new furniture. Along with all of that, we also acquired new debt. For every raise in pay, we increased our debt load, always making just enough to maintain our lifestyle. When divorce hit, so did the financial crisis. Our incomes, together, were barely sufficient. Now that we had two households, our outflow greatly exceeded our income. In short, we had lived our lives too close to the bone, with no reserve or safety outlet.

This is the way many of us live. We spend what we have, acquire more than we need, and suffer the consequences. There is no doubt that the tremendous stress under which we found ourselves contributed to our failed marriage. There is also no doubt that it was the choice to spend more than we needed to spend that caused most of our stress.

I have a relative that recently purchased a house. Smart move? He also had recently purchased a new truck. He loves to enjoy his weekends, and takes numerous trips. He makes a good wage, and felt that he could afford these indulgences. Six months after purchasing the house, he was forced to sell his truck. He was, like us, living too close to the bone.

There is a simple solution. So simple, in fact, that it seems to be unacceptable for a lot of us. Want less. Need less. Spend less. Save a little. If we, or this relative, had set aside a small reserve fund each month, we would have survived.

The reserve is like your bottle of Aspirin in the medicine cabinet. It doesn’t have to be powerfully effective, or large. It needs to relieve some of the pressure.

Oddly, just knowing that you are not cutting your finances too closely alleviates almost all concerns.

Again, when I was in my twenties, I had begun experiencing tremendous chest pains, across the entire width of my chest. I was convinced that I was responding to stress. Nonetheless, I consulted my doctor, who prescribed nitro pills, to be held under the tongue if another attack occurred. This is the same medication used for heart patients, and I was only twenty-eight!

I purchased the pills. However, just having the pills available seemed to do the trick, and I never again had a chest pain. Stress remained, though, and within three months, I … Read More