| Total Equity Method |
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The Total Equity Method of money management is perhaps the most aggressive technique in that it allows for the largest loss percentage on a single trade. As mentioned in the Money Management Overview, the main key to successful trading is the use of objective trade allocation and risk management. Traders all too often focus on how much they can make from a trade versus how much they can lose. Money management techniques help to overcome this.Assuming you are following a good trading strategy, before you enter any trade, you have defined a price at which you will exit in the event it is a losing trade. Let's use an example to illustrate how the Total Equity Method works: You have identified a stock with a price of $25 and a stop-loss of $24, therefore meaning you will lose $1 per share. You have a $10,000 portfolio to invest. As mentioned in the Overview, it is important to determine you will lose no more than 2% of your portfolio value on any one trade. The Modified Total Equity method usues your entire account value in your risk capital calculation. In this case, you can lose 2% of $10,000, or $200. Now, with losing $1 per share, you can trade only 200 shares. Assuming your trade moves up, and you now have an account value of $11,000. On your next trade, you can assume risk of 2% of $11,000 or $220. This method allows you to increase your position size as your account increases. However this is the most risky method since it takes into account unrealized gains. |
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