Page 403 - THE MARKET WHISPERER

THE MARKET WHISPERER 39 9

Money Management

You have chosen a stock correctly, and bought or shorted it at the correct
point. What happens next? Correct money management is the difference
between the professional trader who earns a living from trading, and the
amateur who provides the pros with their earnings! Many new traders
place too much weight on technical and financial aspects and view money
management as extraneous, although it is an imperative tool.

Ask yourselves what you would do when a stock you bought at the
correct point breaks out and trends up strongly. Amateurs will look at
the stock’s chart, rub their hand with glee, admit their good fortune, and
perhaps even increase the amount. What does the pro do following a
breakout? Certainly not shout out, “I’ve got a winner!” The pro shouts out,
“Who’s the sucker I can now push this stock onto?”

If you have ever bought stocks, try to remember and reconstruct the
trades you executed in recent years. Let me describe the process. I am
familiar with the stocks you bought and your methods of managing them.
Is this what you did? You usually bought at the right time. I will also give
you credit and say that shortly after buying, you almost always were in
the money and were even quite pleased with your decision to buy: am I
correct? The only problem was that you held on to them for a fraction too
long, enough for the whole episode to end in a loss.

Correct money management allows you to profit even if your success
rates are below 50%. One day recently, as I was writing this book, I closed
a day’s trading in profits even though I lost over eight trades and gained
in just three. Correct money management lets me exit a failed trade with a
small loss, and milk a successful trade to the maximum.

• Rule 1: Lock In Profits
In trading jargon, a partial means realizing a partial profit. Once the

stock has broken out, immediately when its first weak point shows, you
need to sell at least 75% of the shares you bought at the breakout. This is
called selling into the power. Then, continue trading with the remaining
quarter amount alone. The smart thing, of course, is to identify the first
weak point, but not to flee too early. One rule of thumb says that you must