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Money Management Tips for Stock Traders

Managing money wisely is one of the most difficult aspects of stock market trading to master. It refers to all the nitty-gritty detail work you have to do to make all your trades work together as a successful portfolio. It's not always easy, and it's not always fun, but it's crucial to coming out of the game with profits on the table.

There are four basic components to money management for traders: trading, allocating, recordkeeping and minimizing costs.

Trading

Most people end up holding losers too long and selling winners too early, leaving them to wonder what the secret of trading is. But the best traders know that one of the "secrets" to trading isn't really a secret at all. It just means ensuring that your gains outweigh your losses. To do this, you can't rely on fortune-telling, market-timing, or plain dumb luck—you need to follow a trading plan.

Believe it or not, it becomes stressful for people to have stocks that actually move up fast. Take GSS, for instance. It was in the upper $2s or low $3s, and then it shot up to the $4s. That meant a lot of gains on the table. But it actually caused panic. The same goes for a stock that goes down quickly.

That's where Trending123 comes in: We actually give you a stock trading system. All you have to do is follow it. How? Easy: Use the Trending123 Portfolio Table. It makes money management simple with a color-coded system of trading instructions:

  1. Yellow means the setup has triggered the entry price and action can be taken.
  2. Green means target has been hit or a profit alert has been issued.
  3. Red means a stop loss has been hit or a stop alert has been issued.
  4. Blue means the entry price has not been triggered but it's close, or as I like to say, "on deck," so stay tuned and be ready.

All you need to do is wait on alerts and direction, and remember that nothing is ever set in stone. We always have a trading plan, but trading plans, like the market, are not static. We have to revise them sometimes according to market conditions and new positions that we take on. Since the market is constantly evolving, we need to have the flexibility to change and modify our trading plans to accommodate the changing risks.

Allocating

When it comes to losers, we all know what to do: hold. It's winners that we have the biggest issues with—because we're not used to a lot of them. So let's talk about investment portfolio management and the word "dumb."

First and foremost, no position should ever be more than 5% of your investment portfolio. People get into the biggest trouble when they hear someone excited about a stock or are excited about it themselves, and they think for sure it's going to skyrocket. They think, "It's got to go to the moon, because did you not hear how he talked in that update? It’s a surefire winner!”

But even though the majority of positions in a portfolio may be winners, some will be losers. This calls for strategic asset allocation, meaning that you can't allocate too much to any single position. Poor asset allocation is a sure way to ruin a portfolio of winners.

But why did I mention the word "dumb" at the beginning? That's simple: because from this point forward, we will never be as dumb as we are right now. Five minutes from now we're going to learn something new. And that makes us smarter. Tomorrow we're going to learn more. And that's going to make us even smarter. The next day you're going to learn even more. And we're going to be even smarter.

So as far as dumb goes, we've officially bottomed as the human race, because tomorrow, and the next day, and the next day, we're going to keep learning new things. But don't forget what you have already learned, because the last thing you want to do is make dumb moves in your portfolio management.

Recordkeeping

You can trade year in and year out without ever violating the rules of allocation, but if you don't keep track of what you're doing, you won't know if you've actually made progress. A simple way to do that is to keep a trading journal.

In your daily journal for stock trading, you should note all the information relevant to each trade you make. Your trading journal template (how it's formatted) is up to you,  whatever works best for you—but it's important to keep it consistent and organized for easy reference and comparison.

Here are some things you should note in your journal:

  1. Why did you buy a stock?
  2. Did you have any issues with holding the stock as you waited for it to reach price target?
  3. Why did you exit the stock?
  4. Did you made a profit or a loss? And how much?

After all, if you don't know what you're doing right, you can't develop the skills you already have. And if you don't know what you're doing wrong, you could end up blaming "bad luck" instead of correcting bad habits.

Knowledge is power. Even better, knowledge is profits. Especially if you're going into technical analysis.

Minimizing Costs

When it comes to trading, you can't ignore costs. Whether it's ongoing expenses of an ETF or commissions you pay to make trades, costs always reduce your overall return. And just like with returns, you can't just look at the dollar amount of costs—you have to look at the percentage. After all, the smaller your portfolio, the more trading costs will hurt you.

For example, let's say each trade costs you $7. If you pay $7 to buy $100 worth of stock, your cost to initiate the trade is 7% of your principal. And if you pay another $7 to sell it, your cost to close the trade is also 7%. So your total commission costs are 14% of your principal ($14/$100), meaning you have to make at least a 14% profit in that stock just to break even. Those sure aren't very good odds.

But let's say you put in $1,000. The $14 you spend for one round trip in and out of the stock is only 1.4% of $1,000, giving you much better odds.

And now suppose you could trade for free—that would give you the best possible odds. Impossible, you say? Not at all:

  1. WellsFargo offers up to 100 free trades per year with a PMA checking account and $25,000 in assets among all your WellsFargo accounts.
  2. Bank of America offers up to 30 free trades per month with $25,000 in bank deposit accounts.
  3. Zecco.com, a startup company financed in part by Morten Lund, the first backer of Skype, offers free trades with $2,500 invested.

(Note: Trending123 has no affiliation with the above companies and cannot offer personal advice regarding which broker you should choose.)

You should note that you might incur fees if you move your money from your current broker to another, and you might end up paying commissions to the above brokers if you trade frequently or your balance falls below the minimum. So you should be sure to explore all the fees and services of each broker before making any decisions.

Whatever broker you choose, a good rule of thumb is to make sure that your portfolio expense ratio stays as low as possible. The lower it is, the better, because every dollar you save means more profits on your bottom line.