Money Management For Traders

Strategies Is Not Everything ...
Almost anyone can make few good trades with handsome return, however there are very few can consistently grow equity year over year. 

Trading is extremely stressful yet exciting, an effective Money Management would help to protect your capital when the market is all against you. 

Capital is the bread and butter for a trader, without that there is no way to make money in the market 


Stay In The Game ...
Money Management is a technique employed at making money, inclusive of capital budgeting, trading performance review, mental readiness and emotional control.

Apart from trading strategies and knowledge, Money Management is equally important for a trader to stay in the game as long as possible.

The methods to stay in the game are :

1. LIMIT SIZE ON EACH TRADE(5% RULE)
• Always trade with 5% of your total capital, that would translate into more than 20 trades.
• Amount for each trade has to be adjusted accordingly to your latest capital. 
2. PROFIT TAKING / STOP LOSS
• Establish a support and resistance line based on technical analysis.
• Take profit @ resistance and stop loss @ support
3. STOP ON LOSING STREAKS (15% RULE)
• There is always a low point for a trader, regardless of their level of skills.
• As soon as your capital dip by 15% after few unsuccessful trades, STOP TRADING.  
• Take a rest for few days -> perform postmortem for unsuccessful trades -> come back strongly    
4. RIDING ON WINNING STREAKS
• Don't stop when you start to build up momentum 
• Always stick to the 5% rule no matter what.

The beauty of 5% rule is it will automatically reduce your trade size during losing streaks and vice versa, you will make bigger trade when you are doing well and smaller trade when you are not. 

Key Takeaway ...

Money Management will keep you from making profits on a whole bunch of smaller trades and then giving it all back on one bad trade.

Happy Trading ... =)

Buy And Hold Strategy

The Definition
'Buy and Hold' is a investment strategy in which investor buys stocks or equivalent and holds them for long period of time (years) regardless of short term market fluctuation. 

The believers of 'Buy and Hold' strategy actively select stocks based on 'Fundamental Analysis' (assessment of a company's financial status), searching for undervalued or potential growth stock, and once in position, is unmoved by price movement.

Usually, investors will only sell the stocks if the company's financial strength deteriorated based on financial statement.

All public listed companies were required to submit a financial report consist of Balance sheet, Income Statement and Cash Flow statement every quarter (1 quarter = 3 months)  

Does it works?
There are arguments over whether a buy and hold strategy is actually superior to any other strategy, for instance trading using 'Technical Analysis' (charting using lagging indicators such as momentum to predict price movement), anyhow lets take a look at 2 case study below before drawing any conclusion.

Case Study 1 - Exxon Mobil (XOM)

If we invested XOM at 'A' @ year 1970 and hold it until 'B' @ year 2013, the total return is 4900% over 43 years as a result of compounding effect, excluding dividend. Financial freedom for sure after retirement, in this case 'Buy & Hold' strategy clearly demonstrate its worth.

Case Study 2 - Coca Cola (KO)

If we invested KO at 'A' @ year 1962 and hold it until 'C' @ year 2013, the total return is 4000% over 53 years as a result of compounding effect, excluding dividend. However if we made a awful decision to enter at 'B', the stock still worth the same price as 15 years ago, 'Buy & Hold' strategy seems like not fruitful at all.

'Buy & Hold' strategy will only works for who has the right knowledge to discover 'Unpolished Gem' in stock market, in addition to that, great discipline is also important to ensure 'The Golden Goose' is kept alive.


Good new is this is not the only strategy around for wealth accumulation ... So stay tune =)

The Story of Golden Goose

Ever heard about the fairy tale story of a goose that laid the golden eggs? If you haven't, please allow me to tell a simple and short story...

'Once upon a time, there once was a man who owned a wonderful goose. Every morning, the goose laid for him a big, beautiful egg — an egg made of pure, shiny, solid gold. Every morning, the man collected golden eggs. And little by little, egg by egg, he began to grow rich. But the man wanted more. “My goose has all those golden eggs insider her,” he kept thinking. “Why not get them all at once?” One day he couldn't wait any longer. He grabbed the goose and killed her. But there were no eggs inside her! “Why did I do that?” the man cried! "Now there will be no more golden eggs"'

Why is this story relevant ?

The power of compounding is simply amazing, however we need to be consistent and discipline for 20, 30 or even longer time before it becomes rewarding.

20 years is a long time, a lot of stuffs can happen between now and then ... Mr. X might be tempted to withdraw some fund to travel around the world, preventing it to be compounded ... Mr. Y might be forced to withdraw for disease treatment ... Mr. Z might be using the fund for new car purchase ... Any of the above actions are as good as KILLING THE GOLDEN GOOSE.

To kill the goose that lays the golden egg is to destroy something that provides a steady, long term gain.

If we have committed monthly fund into 'Play Account', travelling is not a concern.

If we have committed monthly fund as 'Long Term Saving', we would have money for a new car.

If we ensured ourself are insured by insurance, hospitalization bill is not a burden.

In conclusion, practising 'The Jar System' is essential for everyone who wants to enjoy the fruitful reward from compounding effect.

The Magic of Compounding

~ BY INVESTOPEDIA.COM~

Grow your 'FFA' Year Over Year

Assume we already had some money in 'Financial Freedom Account' and now is how to grow it on yearly basis ?? Before talking about investment vehicles, I would like to introduce an important concept called 'COMPOUND INTEREST'.

Say if we started with RM10K today and grow it 100% per annum, we'll end up with RM5 million in less then 10 years. 

Table below shows the power of compounding at work ...

The earlier you start the better !

Albert Einstein believed compounding is the eighth wonder of the world. Even though the amount doesn't look much at the beginning, it starts to gather momentum and magnifies return in the last few years before your retirement And the most important thing is 'Starting Early'..

Take below example for two different investor :

'Mr. Y starts at the age of 24 and invest RM2000 for consecutive 7 years. Starting 8th years he stops to contribute fund and let his money compound year over year at the rate of 15%.'

'Mr. X starts at the age of 31 after he finally has some money to invest after quitting party-boy life style. He contributes RM2000 every year until the age of 55. Same annual growth rate at 15%.'

End of the investment cycle, Mr. Y realise the larger investment sum at an impressive return of 5885% with his RM14000 in total compared to 879% return rate from RM50000 in total by Mr. X.
 

Mr. Y enjoy more return % with lower investment due to the power of compounding effect, no rocket science here.

Fix Deposit = Safe Haven ?

Majority of people love fix deposit because of its nature of protected capital as well as higher interest rate (if compared to conventional saving rate). However the good old day where fix deposit rate at 7-10% (year 1980-1998) already passed it, at 3% today it can even beat the inflation rate at 5-10%. 

Take below example for two different investor :

'Miss. A is a conservative girl who keep all her money as fix deposit in the bank. Deposit per annum is RM 2000 and interest rate is 3%.'

'Miss. B starts to invest in stock market with the same deposit of RM 2000 per annum. Even with the volatile market, she generates return at an average rate of 15%.'

At the age of 55, Miss B's net worth is RM1.3 million vs Miss A's RM110K, with the same investment of RM64K. Even if we understand compounding can magnify returns, we need to ENSURE RETURN IS HIGH enough for wealth accumulation.

Miss B now has a choice to convert everything into fix deposit, the 3% interest from RM1.3 million should be enough to cover majority of her expenses after retirement, not to forget she still has her net worth in 'Long Term Saving' (LTSS) account.

 

Miss A can't put her money into stock market because at this age she can't afford to risk her old day saving, and the 3% fix deposit interest from RM108K is just insignificant.

    

Risk it When You're Young ...
Risk your money in 'FFA' When You're Young ...