D. Money Management, Stop-loss & Trailing-Stop
The single most
important concept that a successful technical analyst and trader must fully
comprehend is probability. From this vital concept, the following trading
strategies and techniques are devised to improve the chances of success or at
least reduce the odds of failure.
The importance of money management to
successful trading cannot be over - emphasized. In our view, it is the single
most important factor in deciding whether a trader eventually succeeds or fails.
Out of the financial resources available, what is the exposure or amount that a
trader should have to a particular trade has a big influence in the trader's
The main idea behind these 2 important money
management techniques of stop - loss and trailing - stop is "Let your profits
run but cut your losses."
Stop - loss means that if the price of the
counter falls to a certain predetermined level, a trader should stop the losses
and sell. What the actual stop - loss should be has to be determined by the
trader him or herself. Setting the stop - loss levels can be more complex than
what is generally realised and is dependent on a number of major factors. There
is a trade off in setting a stop - loss " if it is close to your buying price,
the stop - loss can be easily triggered but your loss will be small and vice -
A trailing - stop is used when a counter after you have bought
has gone up in price. What happens is this : Say the price has gone up from
$2.00 to $3.00. To protect your profits (in case the trend turns ) and yet have
a chance to participate ( in case the price still rises ), you place a trailing
- stop at, say, $2.50. This means that if the price falls to $2.50, you sell out
with a profit. As the price goes higher, your trailing - stops should move
higher too. What the trailing - stops will be will have to be decided by each
trader him or herself.