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"This is the final portion of the Trader’s Toolbox: Money Management series. This post will recap the 5 main rules discussed. If you missed our previous post please click here for : Part 1, Part 2 or Part 3.
♦ Setting a goal - Decide what your trading objective is (quick profit and steady return) as well as your risk tolerance level
♦Diversification - If possible, allocate your finances between different products to avert the danger of getting wiped out in a single market. Don’t go overboard, though; think in terms of three to five unrelated instruments. Stick to markets you know, rather than risking the unknown for the sake of diversification...."
Revisit the Trader's Toolbox Post: "Money Management Part 4 of 4" here.
Question about stops...
Does it make sense to put stops on ETFs? I understand the importance of stops for individual stocks, where company news can impact stock price dramatically. However ETFs are essentially a basket of stocks. It seems that putting a stop on an ETF would be like putting a stop on a mutual fund.
Thoughts? comments?
Lesley,
Thank you for your feedback.
I believe stops which are a form of money management are essential in any type of investment.
You can see how we use stops here:
http://club.ino.com/trading/2009/06/how-to-use-money-management-stops-effectively/#more-1465
All the best,
Adam
Diversification, clearly no longer works as all sectors are now trending together.
Hector
You are correct about diversification however look at from a slightly different perspective. Consider volatility, example when the markets were moving up Gold was also but with a momentum factor of 4:1. Therefor if were in and out at the correct times you would have made a bundle- at the wrong times you're a big loser. If you had diversified into inverse ETFs or emerging markets you also could have profited.
Thank you for your advise, for the most part I agree with it. I do have a problem with the diversification part for the past 3 years at least, all markets have been moving together up or down. If you look at charts of stocks, comodities, gold and silver they all been rallying together or falling together. If you had been diversifide across all this markets you would have been hit hard during the drops. Diversification is a mith.