Lessons

Lesson 5: Money Management

Before you get concerned with the title, please do not worry. This is not going to be a few hundred words of me telling you not to put all of your eggs in one basket. You already know better than to do that, after all I seemed you can watching me and dialoguing with me for his last two weeks.

This also isn’t going to be a piece that tells you not to invest money that you cannot afford to lose. Hopefully you are smart enough not to do this.

Instead, the purpose of this final foundation lesson is that I want to reinforce the fact that an important part of successful trading is making sure that your money is always working for you. If it’s not doing this, then it is completely pointless sitting in your trade balance on used. Think of money as a limited resource which you have to use to the best of your capabilities to generate as much output is possible. Think of the whole process is of factory where the more effectively you use your limited resources, the greater the end products and output. This mindset fits in very well with my method of trading that is very aggressively targeted towards wealth generation and compounding growth. Let us face it, we are in this to generate profits and the only way to continually generate profits is to conduct successful trades.

Now by saying this, I do not mean that all of your money should be involved in trades at once, but at no point should the money in your account be sitting idle. Even if it is not involved in trades at the moment, you should always have written down three category breakup of your money:

A.) Money that is already committed to open trades and is in use hopefully earning.

B.) Money in your balance that is intended to open new trades in the very near future that will hopefully earn.

C.) Money that is set aside for the purpose of defending current trades should the need arise or to take advantage of an opportunity should one present itself in the market. (Trust me there is nothing more frustrating than seeing an opportunity slip through your fingers quite simply because you didn’t have the foresight to keep some capital in reserve just in case.)

With such a setup as above, your money is effectively always useful to you which is the exact point of it being on deposit with your broker. Now every trader finds themselves different ratios which they are happy and these ratios will increase as your confidence and experience increases and you’ll be able to allocate larger amounts as your win rate (success rate) becomes higher. But I recommend you start small. Bear in mind that as you start trading, initially you will make many mistakes (at least most people will). This means you have to factor in that you must be able to recover from these mistakes. I could spend a lot of time here explaining how its easier to recover from a 5% loss than a 20% loss, but I do not need to insult your intellegence.

What I will finish by saying is a that the situation which you do not want is to have one percent of your capital invested in trades and the other 99% sitting idle in your balance sitting idle. That is not a constructive use of money and if this is the case your money is better spent invested in risk-free assets.

6 Comments

  1. Thanks Mohammed for another insightful lesson.

    I have money locked with one of the traders for over $1000 which has been locked in some cases trades since 11/7/2015! I have paused copy until some of the Apple trades go green before stop copying him.
    This money will be for me to use to trade alongside you or when there is an opportunity to have those “awesome” trades to take full advantage for quick greens.
    Thanks again. I feel that I should find one of the Itachi pictures and using it as a show for support to your efforts that you have done 🙂

  2. “the situation which you do not want is to have one percent of your capital invested in trades and the other 99% sitting idle in your balance sitting idle. That is not a constructive use of money and if this is the case your money is better spent invested in risk-free assets.”

    This should be known by the eToro staff, since the P.I’s program aims exactly to put them in this very category.

    By doing so, they drag their costumers into a larger risk exposure than a risk-free asset, without the expected benefict of having that same risk.

    Thank you for the shared knowledge Mo 😉

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