Trading
Risk-/Money Management
The right system for individual risk and money management is a decisive factor for success or failure in trading. Every trader has to find his own system based on his financial possibilities, goals and risk tolerance. Unfortunately, there is no perfect formula.
This is a very complex topic and we can only touch on it here. Therefore, please inform yourself in detail and find the strategy that suits you best.
Nevertheless, we would like to give you a few basic rules as an example.
Protect your capital!
Greed is a trader's greatest enemy and quickly makes you forget all the risks. In addition to possible gains, every trader must also consider possible losses and calculate these intelligently depending on the size of the portfolio. After all, there must still be enough capital available after a loss phase to recoup the losses.
To illustrate: if after a series of losses 50% of the capital has been lost, it needs 100% to at least get back to the portfolio level before the series of losses. A loss of 50% is therefore completely unacceptable for most traders - no matter how long the losing streak lasts.
Therefore, always work with stop losses and define for yourself, for example, how much you are willing to lose per trade.
The 1% rule of thumb
As a very rough rule of thumb, you could for example never risk more than 1% of your portfolio value per trade.
Example calculation: if the deposit value is 10,000$, then only 100$ may be risked per trade.
If the share costs 100$ for a trade and the stop loss is 95$, you risk 5$ per share. Thus, you can buy 20 shares in this trade and risk a maximum of 1% of the deposit value: 20 shares * 5$ = 100$ maximum loss.
Stock selection
The dow theory is particularly successful with strong-trend stocks. However, the pure technical analysis by means of the dow theory does not include a fundamental analysis of individual stocks. Likewise, price-relevant announcements, such as quarterly reports, are left out.
In order to reduce such fundamental influences, we would like to focus the gace on indices. In contrast to individual stocks, indices have the advantage that they bundle the overall performance of the companies they contain. For this reason, the fluctuation in the value of individual companies (for example, after the publication of quarterly figures) is of minimal importance in trading. Accordingly, a detailed fundamental analysis of the individual shares is less relevant. This is very convenient for the technical trader.
As an example, we would like to refer to the S&P 500. This is one of the most widely-used indices in the world and contains the 500 largest listed US companies by market capitalization. The index is also divided into its 11 sectors, all of which can also be traded individually. You can find a list of the sectors on our "Performance" page.
Of course, you can trade both the indices and individual stocks with our indicator depending on your preference.
Keeping an eye on the market
Even as a technical trader, there are aspects of fundamental analysis that you should never completely lose sight of. The shorter the period in which one holds a stock, the less relevant fundamental facts of this company may seem. However, one should never lose sight of price-relevant events here either.
The basic idea of the dow theory are strong trends. However, if e.g. quarterly earnings are published during a trade, these can suddenly reverse the trend and turn the trade, which was just in the plus, into a loss. Likewise, for example, won or lost supply contracts or license agreements can cause a trend to break unexpectedly. To keep the effort of a detailed fundamental analysis low, we have already referred to indices in the section "Stock selection".
For indices, too, there are price-relevant events that absolutely must be kept in mind. However, these have a much more global focus and - once learned - can be easily incorporated into the daily routine. For example, if you regularly trade the segments of the S&P 500, you should look for all relevant dates in the economic calendar on a daily basis and check whether you want to take the precaution of closing a trade or pulling the stop loss closer to the price in order to anticipate a possible trend reversal at an early stage.