A trader\'s money management system

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c02 JWBK182-McDowell April 25, 2008 15:39 Printer: Yet to come

18 A TRADER’S MONEY MANAGEMENT SYSTEM

only choice I had was to hang in there and stay with the position. The emo-

tions created by this trade gone bad clouded and paralyzed my judgment.

On week three, the upward surge continued, and by that Friday I had

experienced my limit of anxiety. Not being able to take one more second

of pain as I watched my loss grow to an absurd level, I exited the trade. I

lost $30,000 in just three weeks on one trade.

I was so angry I wanted to get even with the market, especially this

particular stock. So, I immediately went long to recoup my money by buy-

ing into the uptrend. The next day, the trend reversed, and I watched for

the next week as my long positions lost money. I finally got out of my long

position with a loss of $2,000. I was devastated financially and emotion-

ally. Trading was not fun anymore. I had lost a total of $32,000 in just four

weeks.

I took some time off, and recouped. Once I regained my senses, I an-

alyzed the trade. It took me awhile before I could look at this trade objec-

tively without getting angry. In the final analysis, if I had used stops and

adhered to them, I would have keep my loss small. I also would have been

able to clearly see the new uptrend developing and would have been able

to enter it early on.

Also, using stops would have kept me objective and in control of myself

and my trading. From that point on, I learned that risk control through stop-

loss setting and propertrade sizewas essential. It took a large hit like this

AMAT loss, along with a devastating blow to my psyche, before I learned

this lesson about risk control on a deep level. Some people say that no one

can fully appreciate the need for risk control until they personally experi-

ence a serious financial loss. It is my hope that maybe, by hearing first-hand

stories like mine, you will recognize the need without first-hand experi-

encing the financial loss yourself—that is, if you haven’t already learned

the expensive way. The markets are the ultimate university of finance and

sometimes the tuition is on par with Harvard, Columbia, or Yale.

A PENNY STOCK TRADE THAT

WENT BANKRUPT

This trade was an interesting trade for me, and again it was many years

back. My entry was based on buying a penny stock that the analysts and my

investment newsletters all said was the best penny stock to buy. The stock

was at approximately 75 cents, so I bought about 30,000 shares, which

amounted to $22,500.

My rationale was this: The newsletter that was recommending this

stock had done extensive analysis. The few analysts I could find following