Why is Money Management important in share market?
Posted On June 17, 2019
Importance of Money Management
Everybody knows, “In Ramayana, Rama told Ravana to go today and come back tomorrow for a fight.” Likewise, if you lost all your capital on day one, how you can trade the next day???
No money, No confident to go for trade after losing all
capital in one day, believe me, it can affect your trading life and
personal/professional life. But if you know proper money management techniques
and control your emotions and make a trade with technical analysis, you can
stay in the market for a long time as a successful trader.
E.g., In trade, if you are buying stocks for RS 10000 and if
you are losing RS 3000 without money management and believe me you can stop
this loss between RS 500 to 200 (5 to2%) if you use proper money management.
Like any business in share market also will have up and down, Market will be cruel some days and kind some days to you. When it is cruel if you control your loss and stay in the market when the kind day comes, you can achieve the success you desire. Money management will help you do all of this. Let’s go straight into topic and understand money management.
Set your mind
First, don’t go for trade blindly. If you have 1 lakh capital first fix how much profit you want 15% or 25% or 40%. Higher the expectation you are willing to take more risk first understand that. In a month having 22 trading days, you don’t need to trade all days. “No trade is a good trade.” Other than losing capital, it is better to avoid trade with compromising your technique. If your technique is not giving the green signal, don’t trade for the day or a week also, but don’t enter in a wrong trade.
Divide and Invest
As we discussed if you have 1 lakh capital, don’t buy a single stock for all your money. Divide your money as 10 parts and invest in 10 stocks. Again divide the sectors not only in AUTO, FINANCE, POWER, PHARMA sector. Invest in multiple sectors so we can avoid loss if you entered in one sector and that sector starts moving down. Also, make a trade in a cycle format, the first week enters in 5 trade and next week which stocks are in profit close that positions and enter in new trades. E.g., if you are entering in 5 trades in the first week and the next week 2 trade are reached your expected target so close that trade and book profit. So currently 3 trades are active and take a few more trades and repeat the cycle.
Strict STOP LOSS.
Why stop loss is so important?
No one worries when your trade is making a profit. What will
happen when the trade moves in the wrong direction? If you are not calculated
your stop loss before entering the trade, you can lose a big part of your
capital because you don’t know when to exit when stocks are moving down.
Take an example; you are buying 100 quantity for ABC stock
for 1000 RS, and it is started falling, and you exited in 980RS of loss 20
points. Another trade you are buying 100 quantity of ABC stock for 1000 RS and
your stop loss is 7RS, and it came to 993RS, so you exited. In the first trade,
you lost 100*20=2000RS and in second trade 100*7=700RS. So you saved your
1300RS in your capital to go for the next good trade which will cover this
Easily, you can lose 2000RS in a trade, but to recover 2000RS from the market, you need a good amount of time. Why I believe the stop loss is a heart of trade in share market for all trades is. Consider a company going to launch a product; it may fail or succeed. They invest 10 Crore in that product for R&D, manufacture, and promotion, and finally, if the product failed, they would lose 10 Crore. But in share market, if you are investing a lakh in a trade, you don’t have to lose all your money. You can stop your loss by keeping a strict stop loss of 5% to 10% depends on your risk appetite.
So, you lost only 5000RS when the trade goes wrong, and you have 95K for the next trade which may go perfectly.
Note of Thanks:
My sincere thanks to Mr.Prabhu sir for giving me this opportunity and Mr.Senthil sir for giving me knowledge which makes me able to write this article.
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About The Author
Future Successful Trader -- Current student of Stock Phoenix