Saturday, June 21, 2008

Managing Trading Account Money

A couple of weeks ago, a subscriber wrote asking how someone who trades for a living manages money in their trading account. The subscriber was interested in whether profits are plowed back into the account or taken out or exactly how the money is managed. One of the most essential points of my book, "Trade Your Way to Wealth", is the importance of an individualized plan. In the book, I emphasize the importance of personalizing your plan and set out in depth guidelines to assist the reader in the construction of his or her own plan.

Since each of us has differing amounts of money, different risk tolerance, different levels of knowledge, prefer different strategies, has different amounts of time to devote to trading, and so on, I believe it is important to create a trading business (whether full time or part time) that meets the specific needs of each individual.

It is the same for those, like me, who trade for their living. I use a specific plan that is designed for me and might not be appropriate for many others. For example, unlike most subscribers, I don't have a job other than trading. I do devote time to individual coaching, speaking engagements, and writing things like these articles, but my real job is trading. Therefore, when it comes time to answer the question will I trade full time or part time, the answer for me is full time.

I can give you an idea of how I go about handling money in my own trading account, but just because I trade for my living does not mean or even suggest that others who trade for their livings are going to do the same thing or even anything similar. First, I want to note that I believe money management is a critical element to successful trading and I devoted time to that concept in "Trade Your Way to Wealth" as well as in archived articles here. There are many ways to manage trading money as I have set out in those writings, but, for me, at least, the important point is to have a money management plan that keeps a trader in the game. Betting it all on one position, for example, may be a money management plan, but it may not be a very good one. If you "bet it all on black" and black doesn't hit, you are no longer in the game. I've seen people do exactly that expecting to hit a home run only to lose it all. So, the first thing I do with my own trading account is have a money management plan.

The subscriber who wrote seemed most interested in what full time traders do with their profits and I can only answer for myself. I have several brokerage accounts, but only one that I identify as a true "trading" account. Among the things I do in that account is trade options and one of the issues with trading options is how large can a trade be. If I am trading something like the "Q's" (QQQQ) (representing the Nasdaq 100 index) or the "Diamonds" (DIA) (representing the Dow) I might be able to take large positions because there is a great deal of open interest. However, if I am trading options in some less liquid options, I need to make sure that my position is not so large as to affect the market or spread in that option. For that reason, I place a limit on the amount of money I keep in the trading account. By some standards, it is a fairly large amount, but it only represents a portion of my liquid assets. I will transfer funds out of the trading account to do things like pay some bills or enter other investments when the account gets above a specific level so I do not reinvest all the profits back through that specific trading account. In another account that I think of as longer term investments (not buy and hold since I always have an exit strategy even if I'm guessing the asset will be a longer term hold) I generally do reinvest profits less living expenses as they are realized. I also use dividend reinvestment plans in that account to accumulate larger positions without commission over time. Of course, the funds in that account are also generally relatively liquid and are available for other large investments like real estate or for emergencies.

As I indicated, that is my own method and is only an illustration of what one trader does. What each trader does with his or her money is the product of their own plan. It may be similar or differ radically from what I do. Trading plans and money management like choosing strategies truly are personal to the trader. I was happy to read the subscriber's question since it is evident that he is giving thought to the issue of what to do with profits. It shows that he is looking for at least a part of a plan and that, to my mind, is a good thing. Once again, I believe a trader can increase the chance of success by taking the time and expending the effort to create a plan that fits his or her individual circumstances.

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved

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Tielhard said...


As a long time reader of your weekly comments I just want to thank you for your perspectives on trading. I trade part time. And the longer I trade the more valuable I find the articles you write on trading psychology, money management, trading discipline and so forth, such as the one you wrote this week on "Managing Trading Account Money."

Linda said...

Bill, your articles are always so helpful and pragmatic. I am a part time trader, long time investor. I have two accounts: one for trading and one for long term buy/hold. I am finding it increasingly harder to have long positions in this volatile and uncertain used to be easy to "park" money in quality companies....I don't find that to be the case now. Any suggestions? I do know there will be great buying opportunities down the road but I wonder when fundamentals will matter again. Any thoughts?

Thanks as always

Anonymous said...

HI Bill,
I really enjoy your articles and would love to be a full time trader for a living.

However my performance doesn't allow me to quit my day job YET!

Thank you for sharing your knowledge with us.

Daryl C.

Bill Kraft, said...

Thank you very much Willijo. I sincerely appreciate your kind comments.
Bill Kraft

Bill Kraft, said...

Linda, I suspect many others share your dilemma. One thing you may want to explore for "parking" money is the Closed End Municipal Funds. They are ETFs (Exchange Traded Funds) that trade like stocks, generally have significantly lesser fees than the standard Open End Mutual Funds, and pay federally tax free dividends on a monthly basis at an annual rate that is between about 5% and 6%. Ordinarily they are not too volatile, but certainly can be traded as well. Thank you for writing.
Bill Kraft

Bill Kraft, said...

Thanks for your email, Daryl. Keep learning and practice trade. Practice trading isn't like real money trading because the emotions will be different, but it does help you complete your knowledge of strategies. Here's to good trading!
Bill Kraft

Anonymous said...

Bill,if I may comment:
1. The way you write your article is very sincere and pragmatic. You put yourself as an ordinary trader (I bought your book because of this reason).
2. However,in my opinion, there is no reason for you not to give your own personal expertise, eventhough you always say that business plan is very personal.(I still believe, eventhough we are not the same but yours can inspire us and give us a huge benefit).
3. The thing that you wrote in this weekend newsletter is the one that I am expecting, so we can learn from there.

Please write more on your personal business plan.
Thank you and warmest regards

Bill Kraft, said...

Frans, thank you for your comments and thank you for buying my book. I hope you enjoy the book. I'll give some consideration to writing more about my own business plan, but I need to make it very clear that is just what it is -- my business plan. It definitely is not for everyone.
Bill Kraft

Anonymous said...

Some readers may not realize that you may not give individual account advice and, that publishing your own personal plan, you could be in hot water for unsuitable advice.
Anyway, I am a full time trader but not very successful. Exit strategy has kept me in the game but limits my ability to diversify. Can you give me a general idea of how much money a full time trader needs and how many different issues are a good mix?

Bill Kraft, said...

Well, dsb, your questions are very difficult and may differ greatly from trader to trader. I plan to devote the Newsletter article this coming
weekend to the questions you raise because I'm sure many traders (both full and part time) share the same concerns. Thanks for writing.
Bill Kraft

Anonymous said...

hi bill
i always read your article and i think they are great. Very informative and you give good adivice. i am a trader and i trade from home (housewife) i would like to find out from you that if a person makes a profit, do we take the whole profit out the account and just play with the capital or leave the capital with a bit of the profits?
what would you suggest?

Bill Kraft, said...

Dear Anonymous who wants to know about whether to take profits out of a trading account or not--
Whether you take some, all, or none of the profits out of your trading account is a completely personal decision. Of course, remember you will have to pay taxes on net profits, but after that it is up to you. As I wrote in the article last weekend, each of us will handle the situation differently since some may want to take some profits out to pay bills or diversify investments while others may want to increase the size of their trading accounts. There is no "right" answer for everyone and I am not permitted to and do not give personal investment advice, so I really cannot make any suggestion on what you should do. Sorry I couldn't be more helpful.
Thanks for writing.
Bill Kraft

Anonymous said...

Hi Bill,
I have just started your book and always read your weekend newsletter. At the end of your newsletters I notice your services. I was wondering which service might be of most use to me. I CAN'T watch the market during the day as I am not able to at work. I can place trades at night but have limited time for study due to my work hours. Which service do you suggest, I was thinking trend trader but thought I would ask for your suggestion.

Thank you!

Bill Kraft, said...

Anonymous who inquired about services --
Thank you for buying my book and for writing. It is really difficult without knowing more to suggest you a specific service. You may have a 30 day free trial, of course, and that should help in making your decision. Trend Trader is a service where I send alerts about stocks I am buying or selling (not short sales) and generally shows the limit order I am placing and a suggestion where I may exit. Since Trend Trader deals with stocks I am buying, it is essentially bullish in nature and has more candidates as the markets turn bullish. Trend Trader positions I take are normally in stocks trading from around $10 to about $60 a share. $10 Trader is much the same but with cheaper stocks. Option Trader, as the name suggests, deals with option plays I am entering or considering. Each of these services is designed to show trades I like and generally am making myself. None of the trades is meant to be personal investment advice. In Option Trader, I demonstrate bullish, bearish, and neutral trades. It sounds as though your biggest concern is the inability to trade during the day. As you continue through Trade Your Way to Wealth, you'll see descriptions of various orders that may be placed so a trader need not be constantly watching the market and which can be used to enter or exit positions even when the trader is not watching the markets. I hope this information helps and thanks, again, for writing.
Bill Kraft