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Understanding ๐Ÿ’ฐ Bankroll Management

The key to #daytrading is ๐Ÿ’ฐ BANKROLL MANAGEMENT! As a trader your number one job is to manage risk. Your max loss on any trade should never be more than 10%. The more you lose, the more you must make to back to get back to break-even point. The grid below shows you why we never want to lose more than 10% on a single trade.

The following chart exhibits the challenge of making your investment back after you lose it. Notice that the more you lose, the amount needed to break even grows exponentially. This is because the money lost is capital that is no longer available for investment. If you lose only 10%, you still have 90% of your capital available for investment. If you lose 50% you only have 50% of your capital available for investment, so a 100% gain is required to get back to break even.

All Day Traders & Swing Investors need to have a capital preservation plan that includes controlling investment losses. Many in the financial industry will tell you to place stops on your individual stocks. But is it possible they recommend this because it creates more trading and therefore more commissions? Why should you sell a stock when it goes down? If the companyโ€™s prospects havenโ€™t changed maybe you should buy more not sell at a loss. What if you used a tactical asset allocation to minimize investment loss and buy more stocks when they are bargains?More on Scaling Techniques will be covered in the next lesson ...stay tuned and thanks for reading...Good Luck Trading

Why It's So Important to Avoid Investment Losses?

Instead of putting stop losses on individual investments, develop an asset allocation for your portfolio that controls your investment losses. Most investors invest too aggressively; they have been taught an outdated buy and hold strategy that forces them to sell in bear markets because they get to the point where they canโ€™t stand the pain of a bear market anymore, and they sell at the wrong time.

Investment Losses and Risk Management

When you experience large losses day trading or swing trading you have less to invest and then your portfolio is in a position that will probably take years to get back to break even. The reality of break-even loss analysis makes losing 50% of your money intolerable! Even if the market gained 10% per year, and you were 100% invested, it would take 7 years (7 instead of 10 because of compounding) to get back to break even. This is unacceptable. You need to invest in a way that allows you to buy low and sell high, not the opposite.

Today's MOJO show ... watch how we nailed this CBLI trade:

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