My Personal money management 4 rules

[sebfr]

Hi,

In the previous topic, i am talking about importance of making good trades before making good profit...

Without money, no trade so money management is a important part of my trading plan. It is essential. money management rules are the way to protect your capital and your profits. Capital conservation should be the first rule in trading and investing. Capital takes time to accumulate, but it can disappear fast if the technical trading rules are not well known and respected. To be more specific, money management is the art of size positions.

Here is my rules :

1. Always Preserve Capital. I always limit loss to 1% of total capital for any one position. Example :
100000$ capital
risk by trade : 100000 * 0.01 = 1000$
Entry price : 10
Stop-loss : 9 -> 10% risk
My investement : (100 * 1000$) / 10 = 10000$
Size positons : 10000$ / 10 (entry price) = 1000 shares

2. Always consider Bet Size and Diversification. Commit a maximum of 5% risk of total capital to all my positions.
Example :
i risk 1% of my capital per trade.
Maximum numbers of positions : 5 => 5 / 1 = 5.

3. Always calculate my Reward/Risk Ratio. Enter a position only when your analysis indicates a minimum 3 points of potential reward for 1 point of risk.

4. A personnal rule that i have never find in any books i bought. Size positions is changing during the time of my trade -> always in one goal : protect my spirit against loss. Human spirit doesn't like losses. Mine too. I prefer to reduce my profit and limited my losses. I have discovered this rule by analizing my losses. How ?
Experience :
I realize by analizing my losses that most of time, price go in my profit target direction without reach it before reach my stop-loss.
Real Example :
I have bought some shares of OMNI.
Entry price : 7.20
Stop-loss : 6.62
target price : 9.
Reward/Risk ratio   31.93 / 8.7 = 3.67...Good > 3.
The rule : i sold half of my positions at 7.9..An it is happened. Even if i have always half of my positions in market (target price isn't reached).
Why this strategy ? Even if my stop-loss is reached before profit price, i have no loss ! Magic...Anf if my profit price is reached before my stop-loss i have profit ! And in this cas my reward/Risk = 2 and not 3...It is correct...
Imagine you have a reward/risk of 3.
You just must be right 1/3 of time to not loss money (in fact it isn't true because commissions and sleepage).
With this strategy, i can be right only 1/5 of time to not loss money !!!! With this rule, money management permit me to limited my losses (capital) but also to increase profitability of my system !

I hope this simple rules can help you to be a better trader.

[sebfr]

Another real example : PEIX...All comments are on "stock picking"...