March 25, 2017: New comments S&P500
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Maintaining good money and riskmanagement habits is more important than correctly applying technical analysis! Good moneymanagement habits ensure that you’ll survive much longer in the stock market, even with a number of trading failures in a row. Good riskmanagement habits ensure that the risktoreward ratio is in your favor, with at least a ratio of one to three.
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Practicing good money and riskmanagement habits helps limit losses in losing trades and helps create profit in winning trades. Let’s assume that you are trading based on daily charts; you would buy a stock and then sell it when the stock drops more than 3% below the buying price. Unfortunately, however, limiting losses is not that easy. In this example, the outcome most likely will be too many losing trades that result in losing all of your money at the end.
How much loss you’re willing to accept will be proportional to how much profit you want to make in a certain period of time. While it’s likely that you’ll only suffer a 2% loss when using hourly charts, your profit target will be in the order of 5%. Using daily charts will result in losses in the range of 10%, but with a profit target in the order of 25%.
Also, do not forget that behind every stock is a company that can go broke! So, you may lose all of your money by investing it in one stock only.
Good Money Management Practices
Good Riskmanagement Practices
Keep an initial stop based on:
Keep a trailing stop for maximum profit based on:
A first moneymanagement method would be to trade in a limited number of stocks out of an unlimited list of stocks.
A second method, which we will discuss later on, would be to trade a fixed, limited number of stocks.
A $25,000 starting capital could be used to invest in 10 stocks at any moment in time, limiting the capital per stock to $2,500.
Keeping an average loss per stock of 10%, or $250, would only constitute a 1% loss in relation to the total capital.
Of course, you would have to calculate your buying power with each purchase in relation to your cash value and the value of the stocks in the portfolio. You could use the following spread sheet for this:
Calculation of the Maximum Buying Power for a Single Stock 



Available cash 
Total buying power 
25000 
=RC[1](SUM(R[1]C[1]:R[10]C[1])) 
Buying value_1 
0 
=RC[1](RC[1]*0.1) 
Buying value_2 
0 
=RC[1](RC[1]*0.1) 
Buying value_3 
0 
=RC[1](RC[1]*0.1) 
Buying value_4 
0 
=RC[1](RC[1]*0.1) 
Buying value_5 
0 
=RC[1](RC[1]*0.1) 
Buying value_6 
0 
=RC[1](RC[1]*0.1) 
Buying value_7 
0 
=RC[1](RC[1]*0.1) 
Buying value_8 
0 
=RC[1](RC[1]*0.1) 
Buying value_9 
0 
=RC[1](RC[1]*0.1) 
Buying value_10 
0 
=RC[1](RC[1]*0.1) 



Allowed buying value 

=IF(R[12]C<R[2]C,0, 

=SUM(R[12]C:R[3]C) 
=SUM(R[12]C:R[3]C) 

Total investment 
Remainder 
Onehundred percent of the cash value above $25,000 will be available for new investments.
The actual value of the 10 contracts in the portfolio will be reduced by 10% (the average stop value) as an extra precaution when calculating the new contract value.
The maximum buying value for one new contract will then be the available cash and the value of the open contracts divided by 10 (10% of the total capital).
Calculation of the Maximum Buying Power for a Single Stock 



Available cash 
Total buying power 
25000 
25000 
Buying value_1 
0 
0 
Buying value_2 
0 
0 
Buying value_3 
0 
0 
Buying value_4 
0 
0 
Buying value_5 
0 
0 
Buying value_6 
0 
0 
Buying value_7 
0 
0 
Buying value_8 
0 
0 
Buying value_9 
0 
0 
Buying value_10 
0 
0 



Allowed buying value 
2500 


0 
0 

Total investment 
Remainder 
We will get the following result with $25,000 starting capital and consecutively buying 10 stocks:
Calculation of the Maximum Buying Power for a Single Stock 



Available cash 
Total buying power 
25000 
1096 
Buying value_1 
2500 
2250 
Buying value_2 
2475 
2228 
Buying value_3 
2450 
2205 
Buying value_4 
2426 
2183 
Buying value_5 
2401 
2161 
Buying value_6 
2377 
2139 
Buying value_7 
2354 
2119 
Buying value_8 
2330 
2097 
Buying value_9 
2307 
2076 
Buying value_10 
2284 
2056 



Allowed buying value 
0 


23904 
21514 

Total investment 
Remainder 
As an example, let’s close trades 1 and 4 with a 30% profit, while all of the other contracts remain open. Adding this profit to the capital gives a new allowed buying value of $2,458.
Calculation of the Maximum Buying Power for a Single Stock 



Available cash 
Total buying power 
26477 
7499 
Buying value_1 
0 
0 
Buying value_2 
2475 
2228 
Buying value_3 
2450 
2205 
Buying value_4 
0 
0 
Buying value_5 
2401 
2161 
Buying value_6 
2377 
2139 
Buying value_7 
2354 
2119 
Buying value_8 
2330 
2097 
Buying value_9 
2307 
2076 
Buying value_10 
2284 
2056 



Allowed buying value 
2458 


18978 
17080 

Total investment 
Remainder 
You can always see the total invested value and the remaining value when all trades would suffer a 10% loss.
Let’s apply this system and calculate the maximum allowed buying value for each contract. Next, let’s assume the most negative scenario: Each of the 10 contracts ends up as a losing trade with a 10% loss. This happens 10 times in a row for a total of 100 consecutive losing trades
Crash resistant? 
10 contracts investment 
10 contracts losing trades 
Remaining amount 




Starting value 
25000 


Trade_1 
23904 
2390 
22610 
Trade_2 
21618 
2162 
20448 
Trade_3 
19552 
1955 
18493 
Trade_4 
17682 
1768 
16725 
Trade_5 
15994 
1599 
15126 
Trade_6 
14464 
1446 
13680 
Trade_7 
13080 
1308 
12372 
Trade_8 
11830 
1183 
11189 
Trade_9 
10699 
1070 
10119 
Trade_10 
9676 
968 
9151 
There still is a remaining capital of $9,151. It looks like good money management; you survive for quite a while, and it’s possible that the following trades will make up for all of the losses!
In the table, you can see the remaining capital after each 10stock trade.
Money & Risk management next Part 1 Part 2 Part 3 Part 4 Part 5 Part 6
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