Money Management Ideas For Large Cap Stock Trading

Money management in the field of stock trading is almost as
important as stock selection Without proper money management it
is very hard to make money while trading stocks And in fact
poor money management can send your balance spiraling down
faster than poor stock selection Because if you hit a rough
patch, where you are losing money, which always seems to come in
faster torrents than winning streaks, than without proper money
management, you will lose huge chunks of dough while floundering
around for a plan
If you have been reading articles by yours truly, and/or
following our blog at http://livingonlargecapsblogspotcom,
then you know, we trade exclusively in large cap stocks And as
I if I haven’t hounded on this point enough, one very nice thing
about large cap stocks is their predictability, and frankly lack
of volatility Predictability is nice for trading and making
profits Lack of volatility is great for helping in money
management It is this lack of volatility that rarely will put
you in the situation mentioned above, where, huge chunks of
dough are being shredded, in the blink of an eye But it can and
does happen, and that is what you need money management for
Because I trade in only large caps, I am extremely aggressive in
money management I was in the 90’s too, when I traded hi-techs,
dot-coms, and bio techs too, and frankly that is what sunk me
Constant margin calls, forced me to sell or cover stocks that
went against my position, and when trades did open up and looked
like that ‘can’t miss’, I had to liquidate some other trade to
open the ‘can’t miss’ one All of this led me to becoming broke,
and leaving stock trading for several years But the reflection
has paid off more handsomely than I could have ever guessed So
back to money management I will tell you what I do, this is not
a recommendation, just a presentation of ideas But as we have
earned over 50% per year for three years trading large caps,
this money managemnt system actually increases that yield to
close to 75%, and that is after commissions
We generally have eight to nine open positions Sometimes less,
sometimes more And we always use a margin account, which
automatically will increase your returns, or frankly losses To
avoid margin calls, we use only half of the available margin in
any one direction So for example if we have a $10,000 stock
account Go ahead and figure eight positions for the time being,
if you follow our blog trades and we go higher than 8, you might
have to skip a couple of trades, until you liquidate, do not get
in the happen of closing out one trade just to jump into a new
one As you know if you use margin you actually have $20,000
available to you, keeping half of your margin out of the market
leaves you with $15,000 for trading If you figure 8 trades,
that leaves you investing about $1,875 per trade Now most
people think one cannot make money trading large caps, let alone
only holding them for about a month And only trading $1875 per
trade But our average trade through 2005 at the time of I am
writing this has been just over 4%, per trade At $1875 that is
$75 profit per trade Commissions now run as low as $7 per
trade, I have actually seen some advertised that are lower, but
we will use $7 (available at Scott Trade), so if you subtract
the $14 to buy and sell from your $75 profit that leaves you
with $59 in your pocket And more money to trade with, you take
your new balance and divide by 8 and viola your next trade will
be $1886 And so it goes, on and on, you average trade earns you
$59, you average trade lasts a month, your average monthly gain
will be $640 But as your balance grows so do the size of your
trades
Two nice, very nice things happen as your average trade grows
One is the commission as a percentage of your trade drops, and
two your account size grows exponentially
Besides commissions, there is also margin interest, which runs
currently at about 8% annually Which on a $10,000 account will
cost you about $66 So your $640 profit actually becomes about
$575 On the plus side, since we are trading large caps, you
will find dividends rolling into your account which offset your
margin cost, but as those are random, and I don’t trade with
them in mind, just call them a nice little bonus Lastly there
is the tax thing, which can hurt depending on your level of
income The Feds don’t give you a break on short-term profits,
so expect to give some of this money back But it is still
better than digging ditches
So that is how I decide how much to invest per trade I actually
divide by 10, and as aggressive as I am, I don’t leave 50% of my
margin in reserve IF I am both long and short the market at the
same time If I am only long I do heed the 50% reserve, as a
cushion It also gives me money to short when it becomes likely
there will be a short pull back, or to hedge against a pull
back, but I don’t want to yet sell my longs
As for losses, you can institute a stop-loss system on your
positions, only wanting risk say a 5% pull back I have tried
that in the past, and most traders will swear you have to do it
But again since we are trading large caps, I no longer put in a
stop loss If a trade is obviously not going to make money, the
last place I want to get out, is when I have had enough and
can’t take it anymore I will wait until the price rebounds a
bit and then dump it It is amazing how not panicking, can save
you thousands in losses per year Again this is where it pays to
keep 50% of your margin off the table so you can temporarily
absorb moves against your positions, without having to heed a
margin call
When a stock is moving in my favor I do lock in profits, however
with moving stop-limit orders On long positions I find I do
almost as well locking 35% profit once a stock’s intra-day high
is 5% above my entry price I then keep moving up the stop-loss
as the stocks highs become higher Sometimes I use technical
analysis to pinpoint where I think a stock’s rally will be over
But many times I find the stock hits that point and then
re-rallies, so a pure percatnatge stop-limit system of exiting
profitbale positions works very well On shorts, I usually keep
the stop-limits very tight, especially if the market is not in a
downtrend When a short moves against me, I tend to exit at the
first sign of it’s next down ward move is ending I don’t
usually find shorts as profitable as longs, but I do use them
In other words I again wait for my short to move somewhat in my
favor limiting the loss and then I cover
Trade without fear and greed and you will trade better A clear
money management plan, will help you eliminate fear and greed

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