How To Define Your Trading Float

In defining your cash management rules to start trading, step one should be deciding on your trading float. This is the quantity of money you have got to trade with. Before you set the exact amount, it is important to define your objectives in trading.

You need to be clear on the amount of time you have available to spend trading. Can you trade full time, part time, or do you have hardly any time to trade, perhaps because of work and family commitments. Next, work out how much capital you have to trade with. There will of course be times when you will experience a loss. Are you comfortable with a loss of 30%, 40%?

What yearly rate of return are you wanting? You need to be pragmatic about this. How much profit do you need to make over what period? This amount will rely on the quantity of risk you're prepared to take. How do you need to take your hard-earned money from the market? Do you need a cashflow ( that is, constantly taking profits out ) or capital expansion ( by growing your capital in the market, using the wonder of compounding interest )?

Remember that money made from trading is not a reliable source of income. Some months, yes, you will make a profit, even maybe a good profit but at other times you need to accept that there will be a string of losses. It is a good idea for the first two years of trading not to focus on your return on investment. Rather, concentrate on refining your trading system and developing good trading habits. You will in this way be putting in the ground work for future trading success. There are tools out there that can help you. Knowing what is Metastock can be beneficial to your trading.

The bigger the trading float you commence with, the easier it is going to be for you to trade. This is because there are certain fixed costs concerned in trading. The most important cost is brokerage. Many brokers charge a fixed charge for every trade and the traders with the bigger fund size will find this simpler to deal with.

Let us say 2 traders open a trade each. One trader's position is costed at $2000 and the second trader's position is worth $20,000. Both traders have matching brokerage charges which are $100 per trade. The trader with the bigger account size has an advantage over the other, as he only has to make 0.5% so as to break even. The other has to make five percent before he breaks even. It is vital that the trader with the littler position be more successful, which places him under greater stress.

There's of course no problem with starting with a smaller float, but you will be at a larger disadvantage than someone with a sizeable amount.

To begin defining your money management rules, think about the objectives you are aiming for in trading. Once you have crystallized these objectives, you will be in a position to consider the size of the float you are going to operate with. This is a key aspect of your money management rules and should be given due consideration before you start trading. Want to get started on the right trading path? Look for a Metastock download so you can familiarize yourself with one of the best tools of the trade.