1. The 2 % rule portfolio management rule
The 2% rule is all to do with portfolio management. The rule is never to risk more than 2% of your portfolio on one trade.
You have a $4000 portfolio, two % of that is $80.
This means your stop loss point should never exceed $80.
By doing this is makes it easy to keep control over your stock market portfolio. By sticking to this rule you don’t run the risk of losing large chunks of money in one go, losing large chunks of money is enough to put any trader off investing.
2. The risk reward ratio
The risk reward ratio is the theory that you risk less money than you potential reward. When trading a stock your stop loss would be your risk point and your exit point (where you plan to exit the trade) would be your reward point. The risk reward ratio should always be 1:3. I you apply this ratio you can lose over 50% of your trades and still make money, heres how;
you make 3 trades and your stop loss is at $200 and you have a risk reward ratio of at least 1:3
trade 1 loses $200
trade 2 wins $600
trade 3 loses $200
you win only 33% of your trades yet the resulting profit and loss would be +$200!
3. Develop trading strategies
Never go into trades without strategies. Whether they are long term strategies and you have done your research on a company (fundamental analysis), or they are short term strategies and you have researched a company’s chart patterns (technical analysis), it is vital that you have a strategy in place. One of the most common happenings in the stock market is someone following a stock tip from their ‘buddy at work’, not researching the stock themselves and consequently losing money (it happens!).
4. Record your trades
It is vital that you record your trades. If your broker doesn’t record your trades (they really should do) then you should manually record them using Excel or a similar program.
By recording your trades it becomes easy to scan over your trades, find out what you have been doing well and find out what you have been going wrong. It is vital to analyse your trades if you are going to improve as a stock market trader over time.
5. Use stop losses!
This is the final but most important rule to investing! Stop losses help you control your losses and greatly reduce the risk involved with stock market trading.
A famous stock market quote is “Poor traders let their losses run and cut their profits short, good traders cut their losses short and let their profits run”. Stop losses allow you to cut your losses short, which means if you use them you are already halfway to becoming a good trader! All you have to do after that is let your profits run!
this article is an extract of http://www.sharesexplained.com/improve-your-trading
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