Capital preservation probably the most important things you need to consider when you are trading in the stock market. You may have a system that works well, but if you lost all your money on 1 trade you will not be able to make money with your system. It is one of the most overlooked aspects of trading.
The market can be very volatile during times. No matter how good of a trader you are the market will always give you surprises now and then. A 100 point down day in the S&P can be followed by 200 point gain in the S&P. It can be stressful for someone who is trying to time the market.
It is for this reason that many people believe that timing the market is impossible. They believe buying and holding a corporation is the only way to make money in the stock market. In fact there is actually a theory out there that is called the Efficient Market Hypothesis that says beating the market is impossible.
That could certainty seem to be true. Many professional traders can have a losing streak from time to time. During this streak there may be times were these professional traders could lose 10 consecutive trades in a row.
With even professional traders able to have consecutive loses how can anyone make money trading in the stock market?
Limiting your losses is the only way to succeed. Think about it if you have $1000 and you risk just $100 per trade you can still lose all your money. If you lose 10 trades in a row your money would be gone. But if you had $1000 and only risk $10 per trade look what happens. You could lose 10 trades in a row and still have $900. Now when you big winner comes along you have money to invest in it.
These are some basic rules you should follow when trading the stock market are.
1. Never risk more than 2% of your account in any 1 trade. If you never risk more than 2% of your account on any 1 trade you will never lose all your money. You will be able you even have a bad luck spree and still not lose all of your money.
2. Never risk more than 10% of your account at any time. Now I am not saying you can’t use more than 10% of your account at any 1 time just don’t risk more. For example if you buy a stock at $52 and put a stop at $50 you are only risking $2.
3. Never trade will all of your money. You should always have capital sitting on the sidelines when you are trading. It is a hard rule for many traders to follow but will help you in the long run.
The other thing you must be able to do is to let your winners ride. The more money you make every time you are right the less often you have to be right. If you make an average of $3 when you are right and lose only $1 when you are wrong you can make money provided are right at least 30% of the time.
Capitol management is all about discipline. If you find yourself going all in on your trades you will not last very long in the market.
For more information on how to make money in the stock market visit http://www.stocks-simplified.com
Author's Bio
When I was young I wanted to learn how to trade the stock market. So I traveled around the country listening to professional traders talk about how they are making money in the market. After trading for a while I understand how easy it is to make money in the stock market and started a site http://www.stocks-simplified.com to help others learn.
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