Manage Your Capital With The Rules of a Legendary Trader
Rule 2: Work with 10% stop loss
Jesse Livermore followed this rule very strictly through out his trading career. The rule is pretty much simple. Pull out of a trade where you might face a loss that is greater than 10% of your actual investment. The more you lose, the harder it will be to recover from it.
It is important that you keep a firm control over your trades. If a stock doesn’t act according to the way you anticipated and starts losing its value, then step out of the trade immediately. Always avoid averaging losses or meeting a margin call. If you want to survive in the market, you need to adopt the habit of accepting losses and pulling out of losing trades quickly.
Rule 3: Play the game with patience
To Jesse Livermore, trading was more like playing poker or bridge where you need to be patient and know exactly when to play your cards. If you miss an opportunity, never panic or don’t be frustrated. Wait for the next opportunity to come and be sure, it will. Many traders fail to succeed in the market due to impatience.
Also you need to keep some cash reserved rather than pouring it all in the market expecting a greater return. Always remember, having some reserve cash in your pocket will provide you backup in the difficult times.
Rule 4: Use your judgment
Use your judgment and be positive about trades where you are in profit- this was the philosophy of Jesse Livermore. When the stock price is advancing, there is no reason for you to get worried. Let it move and hold your position until it starts to reverse.
The whole idea is to buy a stock in a price close to the pivotal point and hold it until the price starts to move backward. Holding the stocks for a longer period of time when it is advancing is the key of reaping a greater profit from your trades.
Rule 5: Withdraw half of the profit from investment
This rule is more important when you have achieved a huge profit from the trades which doubled your actual investment. Here the advice of Jesse Livermore is to put half of your profit in the bank or any other safe place. This will help you to strengthen your financial capability for future investments.
Conclusion
Managing your capital properly is the key of success in the trade market. Jesse Livermore understood this from the early days of his career. You should not invest your whole capital at one time. Also you need to make sure that you do not lose more than 10% of your investment from an unprofitable trade. Always use your judgment for trading and finally put away at least 50% of your profit from the stock market for future investments.
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Tags: Capital, Jesse Livermore, Judgment, Money management rules, Patience