2 For 1 Money Management
Protect Your Capital
The 2 for 1 money management strategy is a conservative way of trading, however, if you are new to trading stocks then this will help you to stay alive while on the learning curve. This money management strategy will help maximize your profits while minimizing your losses!
The basic premise of this strategy is take profits on half of your position once the stock moves equal to your original positions stop loss.
Money Management Example
Let’s suppose that you buy 500 shares of a stock at $35.00. You determine that your stop is going to be at $34.25. You are risking .75/share. Now if the stock goes in your favor you will take ½ of your profits at $35.75 and leave your stop on the remaining shares at 34.25.
What does this accomplish? Well, you took a partial profit on half your shares once the stock moved equal to your positions original stop loss. Now, if you get stopped out on the remaining shares you will have lost nothing!
By taking half your shares off the table, you have given yourself a "free trade" (minus commissions). Assuming that the stock doesn’t gap down overnight, you can let the stock run!
Ok, lets look at an example:
On this chart you can see that this stock has pulled back nicely into the TAZ and has formed a hammer. You decide to buy 400 shares near the end of the day at $32.35. Further, you decide that your stop loss is going to go under the low of the hammer. You put in your order for your stop at $31.25. Your risk is $1.10 a share.
Now you pull out your 2 for 1 money management strategy! You have already determined that your risk on this trade is $1.10, so you add that to your buy price. This equals $33.45. That is the price at which you will sell half your shares (200).
The next day you are a little disappointed because the stock does not hit your profit target ($33.45). But as a disciplined trader, you stick to your plan!
Bingo! The next day the stock moves in your favor and you sell half of your shares at 33.45. You have made $1.10/share on 200 shares. Nice profit! Now you can relax. If you get stopped out on the remaining shares you will have lost nothing!
In this example, we did not get stopped out on the remaining 200 shares. Instead we just trailed our stop on the remaining shares of until stopped out.
The 2 for 1 money management strategy is a great way to protect your capital. This is a defensive way of trading. If you are nervous about a position or the market itself, then this method of money and trade management may come in handy!
