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
P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!
Technorati tags: stock trading stock market investing trend trading swing trading option trading stock options stock option trading Bill Kraft
To comment on Bill's article click on the "comments" link below.