MONEY MANAGEMENT

One of the biggest factors in becoming a successful trader is money management. For now, here are a two strict guide lines I stick to:

1. I've learned in order to open a new position, one must earn the right to open additional positions. You must prove to be profitable after one trade to earn the right to have two open positions. In other words, why have three open positions if you have not been profitable with two. For that matter, why have two open positions, if you haven't proven to be succesful with one.

This principle keeps me very humble. One can see if this is followed, one would have more open positions if he is on a roll. If you are on a losing streak, you will have lesser and lesser open positions. When I first started, I was losing so bad that at one point I was paper trading for a few months!!! :-) But, that is how I learned to define and redefine my trading process.

2. At most, only 20% of one’s current bankroll is allotted for one position. For example, if your bankroll is $1000, only $200 max is allotted for one position. If this trade becomes positive by $100, the bankroll would be $1100. Since the bankroll increased, the max for the next position is increased to $220. Since one has earned the right for another position, the maximum allotted for a 2nd position would then be $176 (20% of 1100-220).
I learned this technique from my horse racing days. This system has kept me alive in more ways one would ever know.

From my experience, stick to these two rules keeps one’s bankroll very healthy.