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stock trading tips: accepting the risk part 2

February 23, 2008 Leave a comment

In a previous post I discussed proper money management, here we will talk about it again as a small business owner. 

It is very important to remember that when you decided stock trading was how you are going to make your living you have decided to open a business. You must learn to treat your capital as your inventory and you must accept the fact that you must spend money to make money.
Lets touch on each of these topics seperately. In order to have a long and consistent career as a stock trader you should strive to grow your capital over time. As you gain experience and your capital base grows you will be risking a larger dollar amount per trade BUT the same % of your total capital. It is not wise to risk $1,000 on a trade when your risk capital is $5,000, I know this sounds crazy but we see it happen at Keystone all the time.

Just last week we watched a new trader with no track record buy 1800 shares of the QQQQ “because it maxed out his buying power.” This is ridiculous. Your share size should not come from your buying power it should be derived from your accepted dollar amount you are willing to risk per trade and the distance between your entry price and your stop loss. If you risk too much of your “inventory” on one trade you are not allowing the probabilities of your edge playing out over time.

You as a business owner must spend money to make money. In a reak brick an mortar business you will have rent, employees, marketing and inventory. All of these require a pre planned and widely accepted expenditure of money. When you are stock trading you should have a similar mindset. “I must accept risking money and accept the fact that i a trade does not make money it is simply a part of running my business.”

We see too many traders who believe that all their trades must “work” or “be right.” That is simply not the case in the real world of running a business nor in the world of stock trading for a living.

Plan out what you are going to do, accept a dollar amount to risk on the idea, commit the capital, let it play out and then move on to the next idea.