Rule #1 : Don't Lose Money

I think it is Warren Buffett, the investment guru who was the one who coined this rule, but I guess it applies to anyone and free for anyone to adopt it.

Many people think that trading stocks is about picking the right stocks.  Well, it is quite true in some sense, but let me just say that it accounts for maybe only 20% of what a makes a successful trade. 

The other 80% is.......

MONEY MANAGEMENT

I know it is going to sound very boring, but this is the fact.  I use a rule i call 20by20 for every position that i go into (i took some cue from Pareto for the naming).  It basically means for every position that i go into, i only use up to MAXIMUM 20% of my total capital, and my cut-loss is at 20%.  Simple as that.  Using this rule, you only lose up to a maximum of 4% of your total capital.  Recouping the 4% you lost is not difficult with your remainder of your portfolio.  (Actually this 4% is derived from the current risk-free interest rate. SO you can adjust accordingly, say maybe if you stay in australia and the RFIR is ~10%)

You can adjust accordingly, but the total still cannot be more than 4% of your capital.  What i mean is if, for example, you like volatility plays, and you know cutting loss at 20% is not realistic with the type of volatility that you are dealing with (and i hope you really know what you are doing :p ),  then you can use 8% of your capital, but you can deal with cut losses of up to 50%.  Still your total risk to your capital is 8% * 50% = 4%.  Coppish ?

Eroding your capital may sound pretty trivial to some people, but if you lose 20% value of your capital, you need to make your remainder perform at 25% just to even out.  For 50% loss, you need to have a portfolio that returns at 100% just to return to your ORIGINAL AMOUNT !

Basically the formula is

(Loss Percentage)/(100% - Loss Percentage). 

If you lose 70% of your risk capital, you need to have a George-Soros-Quantum-Fund like returns of 233% !!!!

Not even the loan shark can get these type of returns !!! Ok, so you get the point.

Since I'm a bit sleepy now and I have to study for my MBA exam next Monday, i think that's all for today,  i have a lot of tips more, but i am no way a guru, so pls do chip in any ideas or inputs you may have, so we all can learn from each other.

Ciao~

P.S.  You need to factor in your trading fees into the 20x20 :)