Transcript of the Podcast
Hi this is your editor Arjun Parthasarathy speaking. The Friday podcast is a value add feature for the followers of Investors are Idiots.com. The brief podcast will select one topic for analysis and will be released every Friday.
This week’s topic is on “ Importance of money management for traders”
Anyone can become a trader. The markets of equities, currencies and commodities are easily accessible. There is a surfeit of free advice for traders from electronic, digital and print media. There are thousands of books available on trading strategies. There are computer programs including high end algo programs for traders who want machines to do their job for them. It is no wonder that everyone from graduates to retired people try their hand at trading for easy money.
The extent of tools and information available for trading should make every trader wealthy. Trading is after all buying low and selling high or selling high and buying low, all in a very short period of time. The theory that for every winner there is a loser is not applicable for traders. Every trader fancies himself/herself as the winner.
The sad truth is very few traders make money for themselves and a majority of the traders make money for brokers, stock exchanges, tipsters, chartists and programmers. If trading was so easy, then why would anyone want to provide services to the traders, they would sit and trade themselves and make the easy money. Trading platforms are similar to that of casinos, the house makes money only because a majority who gamble lose money. After all the house cannot print money to pay every winner‼
The fact also is that everyone loves to trade and gamble and many will do it as a profession while others do it for fun. The ones who trade for a living should have realised by now that the most important skill required for a trader is money management. The trader is risking capital and if the capital is not managed properly, the risk return payoff will not be worth it. In other words, the cost of capital will be higher than the returns generated from trading.
The ones who are starting off trading will not know how to manage the capital, also called risk capital. Beginners luck will work only for a short period of time after which it is pure trading skills than come into play. Many eager traders find themselves caught out early in the game and become disenchanted with trading after losing money. Traders who stick on to trading learn to manage money in trading to become successful while others who have not mastered money management skills are the ones who go on to fund the brokers, stock exchanges, tipsters, chartists and programmers.
What is money management in trading? Money management in trading is managing of risk capital that goes to fund the trades. For example if your chart tells you to buy stock x at a certain price with a book profit and stop loss target, you will have to decide how much of capital you want to risk on that trade. If you have Rs 100,000 as capital, do you want to risk Rs 10,000 or Rs 25,000 on a trade that your chart throws up? If you decide to risk Rs 25,000 on the trade and you hit the stop loss, how will you recover your losses in the next trade? This management of capital is money management in trading. Learn this skill and you will make money in your trading career.
How to master money management? You learn as you go (risk here is you may not learn at all) or you learn from experienced traders. Investors are Idiots.com is in the process of launching a money management series for traders. Those interested can email [email protected] for further details.
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