Lesson 8 – Money Management Rules

/Lesson 8 – Money Management Rules

Always sell your worst performing stock

At some stage you may find that your portfolio is fully committed and you want to take advantage of another opportunity. The only way raise the necessary capital is to sell a stock. In this case always choose your worst performing stock; NEVER sell the stock that is in profit. If you were to continuously sell the best performing stock from a portfolio, you will end up with a portfolio full of losing stocks.

Get rid of the losing stocks in the first instance will lead to a portfolio of stocks that are performing well.  If all your trading funds are tied up in various stocks and you need funds from that account for any reason, always sell your worst performing stock to realize the required funds. There is usually the temptation to sell the stock with the greatest unrealized profit. This is simple psychology – in order to sell the worst performing stock you need to realize a loss and this is not easy to do, but it is definitely the best thing to do.

If you were to continuously sell the best performing stock from a portfolio, you will end up with a portfolio full of losing stocks.

Consider position sizing

Position sizing can be a complex issue. This document is not designed to give you all the possible rules involving position sizing so do some homework. It is worth your time studying the potential benefits of position sizing. Position sizing is a method of adjusting your position size to suit the risk that you need to take.

For instance let us assume that you have a $100,000 account and are only prepared to risk one percent of that portfolio on any one trade, I.E. $1,000. If you are going to buy a stock at say $1.50 with a .15 cent stop loss then your position size becomes 1000 / .15 = 6,666 shares. (No allowance for brokerage in this instance)

Purchase 6,666 at $1.50 = cost of $9,999

If stopped out at $1.35 = a loss of 6,666 x .15 cents = $999 or 1% of your $100,000 account.

Position sizing can assist in controlling your risk and gives “structure” to your trading plan.