Trading Basics: Evolution of a Trader

CHAPTER 2

Money Management

In movies you hear the phrase Follow the money, so money management is where our journey begins.

Are you like John? He daydreams of working two hours in the morning trading stocks and then catching some rays outside as he powers his bicycle over rolling hills or cruises around the lake in a rowboat, chasing geese. Instead, he is stuck working up to 12 hours a day at a dead-end job he once considered exciting. He opens his checkbook, looks at the balance, and then fires off an e-mail. “How much money do I need to start trading?”

That is a common question without a simple answer. Why? Because it depends on your circumstances. If Aunt LoadedMama left you millions, then you can probably scrape by. But if you are like me and do not have rich relatives or generous benefactors, then you have to depend on your own skills to feed the bank account. Acquiring that skill takes time.

Before going further, let us define terms.

• Buy-and-hold investor, or just investor, trades for the long term. Long term can be as short as six months for testing purposes, but it usually means years. An investor is looking for home runs, stocks that will double or more in price, often while collecting dividends from them.
• Position trader is similar to an investor, but tries to exit when the major price trend changes. Position trades often last months, perhaps up to a year, but rarely longer.
• Swing trader tries to catch the move in a stock from the start of a trend (swing low) to the ...