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Why is Stock trading risk management so important when trading penny stocks?  The number one reason you should become aware of money management when trading stocks, futures and forex is protecting your self from ruin.  Using the following risk management techniqes will not protect you from a bad trading system or bad stock picks.  But it will protect you by slowing down the damage.  

The first rule you will learn is the 2% rule.  This is the maximum amount that you allow yourself to lose on any given trade. More specifically this is the distance between your entry and your stop loss, as well as any commissions or slippage you may suffer. This will allow you to put on a fairly large position while protecting yourself from taking an unrecoverable loss.

The second main rule is the 6% rule.  This is the maximum amount of account equity you can lose in a given month.  If you lose more then this amount, close out all your positions and stand aside for the rest of the month.  Use this time as a cooling off period and re-examine yourself, your trading system as well as the markets your trade.  With this rule you protect yourself from experiencing a long sting of loses that otherwise would wipe out your account.

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NOTE: Depending on your risk tollerance you may find that you prefer different money management rules.  For example some traders will use a 1% and 8% rule for risk management.

1. Measure your account value on the first of the month—the total
of cash, cash equivalents, and open positions.
2. Calculate 2% of your equity. This is the maximum you may risk
on any given trade.
3. Calculate 6% of your equity. This is the maximum you are per-
mitted to lose in any given month, after which you must close out
all trades and stop trading for the rest of that month.
4. For every trade, decide on your entry point and a stop; express
your risk per share or per contract in dollars.
5. Divide 2% of your equity by your risk per share to find how
many shares or contracts you may trade. To get a round number,
round it down.
6.Put on a trade only after meeting all of the above conditions.

Let me give a quick example to explain further.  As of the time of writing (09/04/09) symbol TA (TravelCenters of America LLC) has been moving up very nicely. But before putting an order in with your broker you must first calculate how much you can risk on this trade.

1. Account size is $10,000.
2. 0.02 x 10,000 = 200
3. 0.06 x 10,000 = 600
4. Entry $3.50 Stop $3.17
5. (0.02 x 10,000) / ( 3.50 – 3.17) = 600 Shares

So if you followed the steps correctly you should have a good idea of how many shares you can buy.  This way you can trade very aggressively and still keep your risk under control.

With tight money management rules such as the ones outlined here is pay to enter trades that allow for very close STOPS.  Doing this will reduce the excitement and the overall number of trades you make, but will improve your profit potential quite considerably.

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Market order: This is when you
place a buy or sell order for a stock & you
basically are telling your broker you are willing
to pay the “ask” price (if you are buying) or sell
your shares for the “bid” price(if your are selling).

Note: Market orders are not recommended most
of the time when dealing with microcap/penny stocks.

Limit Order: A set price you will sell your shares/buy
shares for.

Note: Limit orders are the best way to buy and sell
stocks unless you want in or out in a hurry.

GTC order: “Good-til-Cancelled” order. This might be used
for a stock you own that is currently at .10 per share, but
you want to sell at .15. You don’t want to have to log in to your
account to set limit orders every day, so you set a GTC sell
order at .15. This will be good for 30 days or longer, depending
on your broker.

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The following our some of the most powerful tools you can use for placing stops.

1. Stop Loss Order
Place a stop the moment you enter a trade.  A stop will not protect you from a bad trading decision.  Sometimes prices gap through a stop.  Its not a perfect tool but it happens to be the best tool a trader has.

1. When you go long, place a stop below the latest minor support level.
2. When you go short, place a stop above the latest minor resistence level.
3. Place your stop within the extreme of the past two days range.  
4. Avoid all trades where your stop would expose more then two percent of your account equity.

Use the parabolic system to see how you can move your stops as time passes.

I will take you by the hand and show you EXACTLY how to get started…even if you’ve NEVER traded stocks before.

2. Breakeven Order
Once you have entered your order, it has been filled and you have entered your stop order.  There really isn’t much else you can do.  You get to watch and observe. You either grin with pleasure or squirm with pain. When a stock goes in your direction you get the opportunity to enter a protect profit order.

Now you get to choose between keeping your money and getting even more.

RULE: Prices have to move away from your entry point by more then the average daily range before you can move your stop to a break even level.

3. Protect Profit Order

As prices continue to move in your favor you have to protect your paper profits.  Realize that PAPER PROFITS IS REAL MONEY. Risk only a portion of it, as the price for staying in the trade.

The 50% Rules:  Hale of your paper pfits belong to you and half belong to the market.

When you are not sure what to do, exit the trade and watch from the sidelines.  Professionals are perfectably comfortable to re-enter again later after getting stopped out.  

People think much more clearly when then don’t have any money at risk.

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Since announcing a new stock pick
last week, I’ve had over 19,000 emails
to my support staff requesting the
exact date of the pick.

I was forced to hire 2 interns, just to
help respond to all the emails.

Why the HUGE response?

My last stock pick more than tripled
in price…

And allowed many of my subscribers
to make thousands of dollars in under
48 hours.

Well, the answer to each of these
emails was…

Watch As I Make Over $6000 LIVE On Video!

I haven’t yet set an exact date for the
new stock pick, but expect it to be
roughly 6 weeks away.

(this will give you plenty of time to
get ready).

Anyway…

If you want to watch a video where I
myself make $6082.60 trading a
stock pick…

Go here:

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(it also shows you exactly how easy
it is to trade a stock pick).

That’s all folks,

Pete Fisher

PS. Check out what other people have been saying about my stock picks below.

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Membership to the scheme, when available, is quite affordable at 377 US Dollars.  For this stake of little over a buck a day, you get access to the site, (including archived information), daily commentary regards trading in futures, and subscription to an opt-in e-newsletter service.

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Other benefits include access to relevant blogs, sensible and coherent third party articles and a video course, “Stock Market Mastery”, written by Swanson himself.  By giving you access to such a wealth of information, and contacts in the investing and trading industry, Wall Street Window hopes to give you the lessons, ideas and strategies in order you can make the most out of your investments.

That it calls for each member to make their own judgment calls, and put some effort into which trades they select move for, it is far from being an easy cash set-up.  For those individuals looking for a, “do nothing, get rich” solution; the guys at Wall Street Window have no room.

Whilst it would be foolish to suggest that online traders using get rich schemes were responsible for the economic crisis we are currently experiencing, it would be worth discussing whether the growing phenomenon serves to undermine to strength and robustness of stock markets.

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Taking the approach that Wall Street Window has teaches investors; experienced or novice alike, the value of being able to read markets well.  Taking this approach protects not only the individual investors, but also the market as a whole.

Further security seems to come from their approach to membership; which is only offered at certain times throughout the year.  Initially, this sounds very gimmicky of course, however, present members suggest this simply allows the team to offer more dedicated advice and support.

Wall Street Window is obviously a money making exercise for those behind it, that is clear.  However, its benefits to its members are also evident.  It is worthy of mention, but unlikely to be sought by many, but a 100% money back guarantee, plus a personal bonus from Swanson is on offer for anyone not impressed with what they have to offer.

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