The 3-step Ultimate formula for money management and proteticng your funds in stocks trading
Without proper money management, even billionaires like Anil Ambani and Vijay Mallya can go broke. So if you want to know the perfect method to manage and protect your funds in stock market trading then don’t skip this blog and patiently read it till the end and also carry out the calculation shown at the end of the post by yourself.
Why money management in Stock Trading is important?
Many have the hopes of doubling or tripling their money in the stock market in a matter of a few days. They thus enter very risky trades with very little knowledge of technical analysis. This eventually wipes out their funds.
Money management helps you to protect your funds and keep you floating in the Stock Market even if your beginner’s luck has run out. In the Stock market only 3-5% of traders survive and end up being profitable, Money management is one of the secrets of their success.
Check out the 3-step formula below to manage your funds efficiently
THE 3-STEP MONEY MANAGEMENT FORMULA
STEP 1: Asset allocation and diversification
We have all heard don’t keep all your eggs in one basket, I think this phrase must have been written by a stock market trader. Never trade in stocks with all the money that you have. You should always diversify the portfolio and reduce the risk.
Allocate your assets in these 3 segments:
1. Portfolio / Mutual Funds (70% of total funds)
Invest 70% of your money in bluechip stocks or mutual funds. Yes, it takes relatively longer for your money to grow in this segment. But, portfolio and mutual funds are almost risk-free in the long term thus protecting your funds and providing a considerable amount of returns at the same time. If you are a beginner Mutual fund allocation should be higher than your Equity portfolio.
2. Swing Trading (20% of total funds)
This is when you invest in a scrip for a short period of up to 3-4 weeks and earn small amounts of profits. You can expect to earn 5-8% returns in this holding period. Swing trading has moderate risk, thus we allocate 20% of our funds to swing trading
3. Intraday Trading (10% of total funds)
Never allocate more than 10% of your total funds for intraday trading. If you allocate a larger amount, then you are at a higher risk of losing your money if you hit stop-loss.
Moreover, you should do only mock trading/ paper-trading in the initial 2-3 weeks if you are a beginner. You may start trading in live markets if you are comfortably earning profits in mock trading /paper-trading.
However we get leverage in Intraday trading, so we can buy shares of higher value by betting 10% of your money.
STEP 2: Planning the Entry-Exit Mechanism
All trades should be based on proper technical analysis. Profit booking and stop-loss should be strictly followed.
Any stock in an uptrend or downtrend does not move in the same direction forever. There are small retracements in the trends. Thus we enter the scrip during the retracements. (Retracements are temporary change in the price trend with reference to its main trend)
We book profits if the target is achieved, or we exit with a short stop-loss if the scrip moves in the opposite direction.
Refer to the diagram below for a better understanding
We will not hold the stock and wait for our money to turn into half, we will exit at a predetermined level if our trade has gone against our expected direction.
Note down your entry and exit points so that there is clarity while trading.
STEP 3: Position Sizing in Trading
Position sizing is used to define the volume of your trade depending upon your risk-taking ability.
The entry and exit points for any trading position should be pre-defined based on technical analysis. Stop-Loss should not be reduced or zoomed based on your risk-taking ability.
I am showing below a detailed example of Money management in Intraday trading. This topic is explained in-depth with multiple examples and live practice sessions in Money Making Trading Course V.2.For further details and syllabus of the course, refer to the link: https://tusharghone.com/landing
Let us understand this concept:
Total Capital : INR 1,00,000
MF Allocation : INR 40,000
Equity Portfolio Allocation : INR 30,000
Swing Allocation : INR 20,000
Trading Allocation : INR 10,000
Funds available for Intraday : INR 10,000
Scrip Name : ICICI BANK
Entry : 500
Target : 515
Stop-loss : 495
By taking “value at risk per trade” as 3-4% helps us to protect our capital. A lower value of ‘risk per trade’ allows us to take 20 – 22 trades safely, and our capital does not get wiped out even if we make losses in 2-3 subsequent trades.
Trading is a game of probability. Irrespective of our trading knowledge, trades may fail and hit stop-loss. In that case, Money management helps us to stay in the game.
All the concepts on money management are covered in-depth on day 1 of the course. All concepts and maintaining of discipline sheets as shown in the images above are taught in MMTC.
To know more about MMTC, click here.