A trader\'s money management system

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

Confidence in Your Plan 19

this stock did not have anything bad to say. The stock was at its 52-week

low, so how much lower could it go? I was not going to be greedy, be-

cause as soon as the stock got to a dollar, I would start selling it and take

my profit. I did not see any sense in using stops because the stock was so

cheap anyway. So I just decided to let it ride until it got to one dollar, then I

would sell.

The first week the penny stock price rose, and I was ecstatic. I already

had a profit—that newsletter really knew how to pick them. Then, about

a week later, it started to move slowly back down to the price I bought

it at. Oh well, I thought, back to where I started, no big deal. That must

have been the first upward price surge; next surge would be to a dollar, no

problem.

The stock bounced between about 62 cents and 80 cents for approxi-

mately two more weeks, and then boom—it fell to 30 cents with news that

the CEO was quitting and funding was drying up for this company. Liquidity

was low, and even if I wanted to sell, I was not sure I could sell my 30,000

shares. I decided to do nothing, since maybe this stock would bounce back.

Well, to make a long story short, it eventually went bankrupt, and I lost my

entire $22,500.

The lesson learned here is that there is risk and opportunity in every

trade or investment we make. Be sure to trade markets that have enough

liquidity so you can control your risk. And, of course, always have a stop-

loss exit in place because, yes, the price can go lower—it can even go to

zero.

THAT’S WHEN I BECAME A BELIEVER

AND DEVELOPED CONFIDENCE IN MY

PLAN

The point in me telling you those two early experiences in having trades go

bad is that the monetary (and emotional) pain and suffering of these spe-

cific trades with AMAT and the penny stock is what gave me the motivation

to develop a thorough money management system that has kept me on the

right track ever since.

Those two losses are what enabled me to own the heartfelt belief that

risk management was essential to consistent financial success. You may

have the best system and approach in the world and it may earn you great

revenue, but if you give it all back on a few bad trades, then you’ve defeated

the entire purpose.

So, yes, I am now a money management believer, heart and soul. And it

is that belief that gives me confidence in the plan that I’ve developed. Over