Money Management

Now let’s talk about how to avoid too many losses.

But, first of all, let’s admit that we’ll not always lucky. A beginner’s luck may run out anytime. Trading stock is about skill and luck. So, how to minimize losses? Use 2% rule. Never put more than 2% of your Capital in stake (to lose) in a position. If you have Rp.100 million capital, never put more than Rp.2 million in stake (to lose) in a position.

For instance, if I want to buy BNBR at Rp.500 now, I would not use more than Rp.5 million (5%) to buy 20 lots of it. Even if I cut loss in Rp.450 (which I doubt it’ll get that way), and I lose 10% of my money there, I still have my capital almost intact (99.5%). But if BNBR is moving upward, say to Rp.550, I’ll add my position with another Rp.5 million (5%), so there’s a total of Rp.10 million (10%) in BNBR now. And if it find a resistance somewhere, I’ll sell the Rp.550 position, and keep my “core” position, waiting for another entry point.

The problem is the “get rich quick scheme” that overruns most investors so that they forget to actually manage their money, and use loan to finance their gamble.

Using the 2% rule, I can survive the stock market for a very long time. You can be sure of it. Let’s say that I lose 10 times in a row, wouldn’t I still up and running? Imagine someone with margin betting 200% of his capital. If his stock loses 10% like mine, he’ll suffer 20% loss immediately. Five losses (not even 10), and he’s out.

Like my previous post, never try to strike a home run in stock market. It’s not that profitable to do so. And remember what we’re after in trading? Money. So, our initial money (the Capital) should be there and we must guard it with our lives. In a sense, it IS our life in the stock market. Without capital, however advanced your skill is, you’re out.