5 Essential Money Management Secrets to Sustain Your Success in Trading

By  //  July 5, 2023

As a new online trader, you’ll be overwhelmed by the number of decisions you must make. Your decision is not just on the financial instruments to trade, but you must decide where, when and how to spend your money.

But what’s most important is keeping yourself in the game, where money management comes in.

You implement techniques and strategies to mitigate risk and multiply your profit during trading. You often tweak your trading position size up or down, depending on the risk-reward ratio. Essentially, that’s bankroll or money management in trading.

Trading is risky but rewarding, so if you want to make money from it, you must save money with every trade, and to do this, you need to learn the ropes and adopt several money management strategies. As TradingGuide advises, savvy traders squeeze out an eighth here and a quarter there, accumulating them to nickels and dimes, and add up to tens of thousands of dollars in the lifetime of their investment. 

And this trick doesn’t limit to those who buy and sell on the same day. Even if you choose to buy and hold for a while, you still need these strategies and techniques to survive the financial market. So, without any further adore, let’s take a look:

Master the factors affecting the price of a stock

Ideally, you want to buy low and sell high. So, it’s essential to know the key parameters that play a role in the volatility of stock prices.

Various factors can influence the price of a stock, and while some apply universally, others are specific to certain stocks. Demand plays a crucial role, as a lack of demand can lead to price decreases, as seen in the case of Sears. 

The financial performance also impacts stock prices, with quarterly earnings reports either meeting, beating, or missing expectations. Company news, such as product developments or changes in leadership, can cause stock prices to fluctuate based on investor perception. 

Economic outlooks shape stock prices, with positive prospects boosting confidence and negative indicators leading to declines.

Geopolitical events, including government actions and global regulations, can impact the stocks of companies operating in affected regions.

All these factors play a crucial role in determining the direction of the prices. So, while paying attention to the news, you should know how they influence the price of the stock you target to buy.

  1. Place your order after the market opens

There’s no guarantee that an asset will open trading at the price it closed the previous night. At the market’s opening bell, unexpected events may occur, leading to potential pitfalls for traders. When buying or receiving much less than expected when selling, you might pay significantly more than you initially intended. 

If you must place your orders before the bell, safeguard your trade with a limit order that allows you to set a maximum or minimum price when selling. It ensures you have better control over the execution price and reduces the likelihood of being adversely affected by sudden price swings.

  1. Timing the Market is not the best option, but time it anyway!

Timing the market is challenging. It’s best to invest regularly as opposed to attempting to have a routine time to buy or sell stocks. But historical trends shade an insight into the volatility of the prices. 

Afternoons are usually busy as everyone has studied the market and had a chance to analyse and digest the previous day’s and the day’s most important news. Besides, the government releases vital market-shaking government stats in the morning, as do most companies. So, the best time to trade is when the activities are high, often from 1300 to 1430 hrs, which remains the best time to trade.

But skilled traders can benefit significantly at market opening first thing in the morning when market volumes are high, and prices can go wild. Remember, the events and news releases since the last closing bell affects the market at opening hours, which is highly volatile. If you can identify the right patterns, you can quickly make a kill. 

This move is risky for novice or unskilled traders and could easily suffer severe losses. As a trading rule, if you’re a novice, you should avoid trading during these volatile hours or at least within the first hour.

The best time to trade for currency trading is when there’s high activity. In most cases, all four markets, capital, forex, money and derivative markets, operate simultaneously. At such a time, there are optimum trading activities, causing significant fluctuation in the prices of currency pairs. And there’s no better time than the afternoon.

  1. For Stocks, Check the demand for any exchange-listed stock before trading.

Most real-time quote systems provide information on the stock’s last price, the bid price, the asking price, and the available number of shares at those prices. There are demand indicators you should check to be on the safe side.

Frequently, when the bid size exceeds the ask size, it indicates a significant demand for the stock. In such cases, it is advisable to buy the stock promptly. 

Similarly, a substantial presence on the ask side suggests numerous sellers are eager to sell. If you intend to sell, better not hesitate.

But when the bid and ask sizes are nearly equal, it’s an ideal opportunity to place a limit order exactly midway between the bid and ask prices. Your order will likely be executed at that midpoint.

The first few hours of the bell and the last hour before the market’s closing see the most trading activity. For the month, April tends to be a strong month for stocks, so sell in April and early May. Since September is often weak, if you intend to buy to hold, September and October when the market has a strong seasonal tendency to bottom, is your best shot.

  1. Stocks trading above $10 a share are good buys

In such cases, purchasing 50 shares of a $20 stock is often more favorable than 200 shares of a $5 stock. There are two key reasons why it’s advisable for you as a trader to go for stocks priced above $10 per share, namely:

  • Firstly, Stocks trading below $10 tend to exhibit larger percentage spreads between bid and ask prices. As a result, a significant price increase is required to break even on such investments.
  • Secondly, companies with low-priced stocks are more susceptible to financial difficulties, including the risk of bankruptcy.

But it’s not always the case. There are exceptions to this general advice. Closed-end funds, for instance, may trade below $10 intentionally, as the management aims to make the share price appear affordable to small investors. Despite this exception, most stocks below $10 carry inherent disadvantages.

Final Word

Mastering money management is crucial To sustain success in trading. Understand the factors impacting stock prices, employ smart strategies, and make informed decisions about timing and stock selection. While trading stocks above $10 for stability is generally advisable, be mindful of exceptions. Continuously learn and refine your money management skills to enhance long-term profitability. By doing so, you can confidently navigate the market, adapt to changes, and increase your chances of success.