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Follow This Money Management Rule

Every trader and investor loves to take a profit. Very often, many seasoned traders will use a trailing stop when they are nicely in the money on a trade. This is a smart strategy to use and is very effective. I always like to move my stop loss to break-even once I lock in my first gain in a trade. I then let the second half position run to the next possible target for a larger and greater gain. This strategy has worked well over the past decades for me and I still use it to this very day.

As I coach I have observed many amateur and novice traders. I see many faults and mistakes when it comes to money management. The biggest mistake that novice traders make is that they do not protect the gains when they have them. So often, traders will show me trades where they should have locked in a profit or trailed their stop loss and they did not take that action. Instead, they allowed the stock to go back down and move below their entry price. When I ask them why they didn’t take a profit and move the stop loss to break-even, they usually say it is because they “thought” the equity was going to go a lot higher. This is understandable, but as a trader we must never let greed, emotions or “thoughts” get in the way of good money management. If you are Warren Buffett then you could probably hold forever, but as (most) traders we do not have that luxury.

Smart traders are playing for moves into support and resistance levels. If you are fortunate enough to own a stock at new all time highs, then that is the more you want to use a trailing stop loss. I recently spoke to a trader who owned Apple Inc (AAPL) at an all time high in February 2020. This trader never used a trailing stop loss and actually sold out of the equity in March just shy of the bottom. This happens all the time with novice traders. I write this so that hopefully, more of you can be aware of it, protect your profits and make more money! Start to learn how to read the charts and then use them. In the trading business, we never stop learning. While it is a humbling business at times we must learn from our mistakes. Remember this rule, never let a good profit run into a loss.

 

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