Neglected Essential : Simple Money Management Rules For Online Stock Trading

I have been posting Stop And Reverse (SAR) levels for some time now, its performance has been satisfactory. Recently I reviewed the performance with bank nifty as example. Since we had budget presented in this review period, the returns were impressive. Now as we have entered sideways market conditions for the past few days, we are getting whipsaws in trading, resulting in losses. One such loss was experienced today in trading nifty. So how to deal with such situations and minimize the loss?

The answer to the above question and for overall "good trading discipline" lies in sound money management practices. Money management is perhaps the most neglected idea in trading, psychology is another aspect often ignored by traders. Some people have written very complicated books on money management and related aspects using all sorts of mathematical ratios. But I am going to present it in a simple way (that's what this blog is all about,"the made easy" stuff right?). It will ensure that you keep your trading volumes in check, thus giving you enough liquidity and peace of mind in tense situations.

So here is what you need to do:
1) First find out how much is your trading capital? Let me take 1,00,000 (one lakh) as trading capital in this example.
2) Divide this amount by 2, that comes to 50,000
3) Keep 2 lots (of 50,000 each ) one for UP trending stock/index and other for DOWN trending stock/index
4) Now divide 50,000 into two, that comes to 25,000 worth two lots.
5) One of these lots (worth 25,000) is for breakout trade (breach of SAR in intraday trading) and other is for a pull back trade (when the price comes close to "low risk entry" in intraday trading )

That's all about it, money management in trading can't be simpler than this. Now let me list some advantages and disadvantages of this plan.

Advantages :

1)The Plan keeps you in both bullish and bearish trending you are automatically hedged.
2)You are diversified, as you will have positions in two different stocks/index
3)You enter into two positions, one at breakout and other at first pullback therefore a lot of confusion in the mind is resolved.
4)You average down your  winning trade and not your losing trade (as long as SAR is not breached you assume that you are in a winning trade). Check this how I suffered badly by averaging my losing trade. You should never average a loss making trade.

Disadvantages :

1) Psychologically it's a bit tough. Why? because you have to be long in one trade and short in another, many new traders are not comfortable with the idea of shorting.
2) What will you do if all stocks are going up and you cannot find a single stock to short and vice versa? In that case you let the other half (50,000 for short) lay idle in cash and wait for one of the short trade to appear (you will surely find it in couple of days)
3) Too much capital is required to follow this plan, it may not be not easy for new trader initially. In that case you should follow half the strategy, that is, enter your trade in two tranches one at breakout other at pullback

Above are some pros and cons of this plan. Clearly I can feel that advantages are more in this plan than disadvantages.

That's all about the plan for the time being. I feel it's quite good. I will make necessary changes as per your feedback and suggestions. Please share your experiences with money management practices and also try to highlight some more advantages and disadvantages of this simple plan.
I hope it will help a lot of traders. It is certainly going to help me :)


  1. @Shazia
    Continuing from yesterday...above plan might give a better trading approach than waiting for closing prices ...take yesterday's example...closing was way above yesterdays stop loss 5185...and we go up again in nifty this might not appear too much...but in stocks it results in very bad experience...
    Your comments regarding above strategy will be can easily find waiting for your feed back

  2. Anuj,

    Keeping 50% for breakout and 50% for pullback is an idea I have used before. And sometimes I think - especially if you are capital starved and very risk averse - that 100% for the pull back is not such a bad idea either .... wrote about it today in m blog .. regards , .....

  3. Hi SOM
    yes you are right...keeping 100 percent for pull back is very good idea for sideways market or stock in FMCG or Pharma...but problem is it is difficult to identify when the market is in trend or sideways movement...only when a significant move has happened we know we are in trend or sideways condition...and just then a breakout or range contraction starts...Elliot wave solves this problem ...provided we can label the wave each wave has it's distinct characteristics

  4. Anuj,

    a couple of days ago, I left a comment on SS blog on sideways trading which - I am very humble to say - SS found it worthwhile to mention in his next posting.

    Anyway, one point of view I have - not seen stressed much else where - is that a pull back is a pullback is a pullback whether the market is sideways or not. If the underlying trend is still intact, pullbacks give multiple opportunities to enter ...... regards , .....

  5. @SOM
    yes I saw that sideways trading post on Sudarshan's blog...I missed your comments ...I will check today ...
    I will try to explain and put some charts regarding pull back and breakout trades that never look back for pullback...thats why I have kept both the option in this plan...check out some fast moving stocks like in sugar sector they seldom show pullbacks...understanding the nature of stock can help in planning a better strategy...

  6. Hi Anuj,
    I like the way you have presented the management plan. The biggest and only disadvantage to my mind is No 1, the psychological part of it. I say this because I underwent stress whenever I took 2 positions in opposite directions in scrips/index.
    Try as much as possible I am not in the camp of automatically hedging, maybe that is why I like a one directional approach to my trade. Though I agree that some sectors or stocks underperform and we can spot them easily enough in an up trending market, but those are usually ( not always though) the news flow ones and technical analysis is not helpful when a stock or sector is heavily influenced by news. (as it might change the trend abruptly.. not to say it is very volatile too)
    Apart from this I think your money management is brilliantly thought of and if we dont (people who are horses like me) do a short trade at the same time as we are long, then idle money is not going to hurt us, rather it might turn out to be the messiah if something goes wrong.
    I think in stock markets if one is able to have idle money then it is not a curse but a boon in most cases than one.
    I too did heavy trading from 06 to 08, but quite fortunately due to the profits I made, and because by Dec 07 end I had shifted my portfolio to low beta and underperforming stocks like FMCG and IT sector which did not fall as much as the real estate and commodity stocks, I did not suffer much in the Jan 08 fall. I made one mistake last year and that was misjudging the election results and was short just before elections and this one trade in one day just changed the tables around. I had no space to escape, the roads were closed, :) but not forever.. I believe "this too shall pass." I keep researching and finding out the reasons for my failure and I realize that to rise, falling is as important, because in failure I went to depths I never thought existed.
    These markets teach us economics, psychology, philosophy and the maths of life.!!!
    You are doing very well with your methods of trading and also helping others like me. I really could not find loopholes in your strategy and the loophole about the psychological disavantage is only mine. It might be useful to others if they can manage stress..

  7. Anuj - Nice plan. To curtail my unruly mind, I am putting into use between brokers - Long Broker and Short broker. "Break outs" are identified when and how? Read about it in "Deepak Singhs" blog - but as in your style is there a calculator ?

    Coming to calculators, I downloaded the RSI calculator. Please tell me how to us and whether I can link RSI,FIB and EW formulae in my own stock list sheet.

    Long live.(since not yours,which handsome man's photo is the label?)

  8. @Shazia
    Psychological problem related to two trades in opposite direction can easily be solved by writing down you trading levels in the evening...with proper stop losses and expected targets...try this for a month or so and you will see the difference
    Yes idle money is an advantage...but it's very difficult for a trader to see idle money in his/her trading account when the market are rising like anything.That leads to over trading and soon the wipe out
    Thanks for reviewing the plan

  9. @Rajagopal
    Thanks for review of this plan
    As per my system breakout are SAR level's breach in my market calls table.If you follow Ilango's levels, I would say it will be his conservative trade's Stop loss level(that's my opinion)I find his conservative trades similar to what I call swing trades..our method is more or less same..based on prices.
    Deepak singh's blog?...can you give me the blog address calculator in my case...that's why I am tracking only 7 securities...other wise I could have posted all stocks.I do it manually ,look at prices
    My Excel skills are not good...I dont know how to link them if I use them I do it individually..Somebody with good Excel skill can seem to have good idea of excel...or ask rajendran of market calls..
    Rsi I feel can be easily integrated as you have already done or ask Ilango...but EW and Fibonacci calculator ...needs manual you have to specify a range to calculate so I dont think these to will be possible(my opinion)
    Photo in label? you mean that dog in man's avatar?'s my photo!!! :))

  10. hi
    hmm maybe you are right. I think i would need to be more flexible in my approach and will try to do by being very mechanical and disciplined..

  11. Anuj,

    this is, I believe, the URL for Deepak Singh's blog:

    I have great difficulty in taking opposite positions in two different indices - though I do see the merit of doing so. Trading is such an individual thing that what is easy for one may be difficult for another. But I love the discussion. ....

  12. Dear Anuj..
    Thanks for your writeup on money management. which is most important for us while carrying any overnight positions..

  13. @Shazia and SOM
    Although I had this idea of money management plan for a while...I never had one before...Couple of days back I got a mail from fellow reader of this blog...he was losing a lot of money on a single trade...along with Shazia's comment yesterday night..gave me enough push to pen down few thoughts and it ended with this plan late last night...I never though of point number 1 and 2 listed in advantages of this plan..that idea struck from nowhere...And now looking at that I feel this incorporates two major ideas which otherwise I never used in my trading..Diversification and hedging (in a different way not in traditional way)
    Hedging is generally taking opposite position in same security (this way you take opposite position but in a different security...which is in it's own you are following trend in both the securities) you deal in two stock not linked with each other...mostly you will end up in unrelated stocks like technology and sugar...or real estate and pharma/FMCG/telecom
    I used to think of hedging as waste of money (as it involves cost)and traders who are not sure of trend and traders with low confidence and no system resolve to hedging(just my opining..please dont mind..)but this way it seems just get the best of both the worlds

    Thanks SOM for Deepak's blog seems the right one

  14. @ramsfm
    Nice to see you here..thanks for your suggest some you have great experience in trading different financial instruments

  15. Thanks Anuj.
    Deepak Singh is
    I noticed the un-intended coincidence in the conservative and your price levels. Will work more on it.

    If you don't mind and share the xls sheet with formula - visible and formatable - it would be a great help. Will tweek it to our requirement. Will send the output to you and once you approve will share it. What I am trying is to include RSI,Wave count etc into individual N-50 stocks.
    Please consider. Ofcourse even the Dog is very handsome. (My wife loves dog. That's why she fell in love with me)


    Condition: Enter only when all odds are in your favor.
    Stand aside when markets are not giving you good trades.
    Trade like a cheetah. The cheetah waits patiently stalking his prey for hours, sometimes days. When the opportunity is right, he suddenly jumps to catch the victim.

    FREE Tools: Intraday 5 day yahoo charts of NIFTY with ema, stoch, RSI & MACD.
    10K->+12K, 25K=>+30K, 1L->+1.2L 3 MONTH CYCLE.
    0.0.25K 1LOT NIFTY
    1.0.5 lakh 3 MONTH
    2. 1 lakh 6 MONTH
    3. 2 lakh 1 YR
    4. 4 lakh 1 YR & 3 MONTH
    5. 8 lakh 1 YR & 6 MONTH
    6. 16 lakh 1 YR & 9 MONTH
    7. 32 lakh 2 YR
    8. 64 lakh 2 YR & 3 MONTH
    9. 128 lakh 2 YR & 6 MONTH

    This is a very good idea to earn in market, if u consistently earn this type then u should be a crorepathi in 2 & half years. If u double ur investment for 9 times.

    If u invest 30/40k, then u should calculate how many years to remaining u become crorepathi. Can U?

    With Best Wishes.

  17. @rajagopal
    thanks for the link to deepak's blog
    I have absolutely no problems in sharing the calculator...the reason I upload it in lock way is because not every body is as comfortable with excel as you are..
    But since you are more into research and want to modify it I will upload all the calculators ,within the same people not familiar with excel can use calculator....while research oriented ones (like you) can work on file...for modifications
    I never thought somebody will find a problem with that...on the contrary I tried to make it simple by only "relevant cells" modifiable.

  18. @Dinesh
    I completely agree with your views on hedging...I never hedged my position... instead I follow the stop loss
    But this new way I would like to use with my market calls table...very often you will see one stock in up other in down trend(if not we can find one easily in market) the idea is to divide your capital in two half and trade one in up trending stock and other in down trending stock....that will check over leveraging and more importantly keep your mind open to all market possibilities
    And money get allocated in stocks in trend (one up ,one down) you mentioned in your point 3
    Nice to see your comment here...I didn't expected that...kool
    Good luck cheers

  19. @Anonymous
    Thanks for your views
    But in this imperfect world,expecting 100 % success in your trades for 2.5 years is a bit tough...we have probably all tried this 10 point gig...but have got disappointed ...
    But you have highlighted new perspectives...although very difficult to be that consistent

  20. Thanks Piyush..hope you find it useful in trading

  21. Dear, Anuj,
    Trading is more of PSYCHOLOGY:-
    It's always easier to enter a losing trade.

    If I say, just loose 10 points every day or 50 points in a week on average.
    Why? Bcoz, u have no fear to loosing money.
    The problem is in our mind.

    Let’s look at an example:

    Which would you prefer: (a) a sure loss of
    $900, or (b) a 95% chance of a $1,000 loss plus a five percent chance of
    no loss at all? Select either (a) or (b).
    Now let’s try one more. Which would you prefer: (a) a sure gain of
    $900, or (b) a 95% chance of a $1,000 gain plus a five percent chance of
    no gain at all? Once again, select either (a) or (b).
    Most people would take the gamble in the first problem. They would
    take the 95% chance of a $1,000 loss plus the 5% chance of no loss at all.
    Is that what you picked? Let’s take a look at how that works out. If you
    multiply $1,000 times 0.95, you get an expectancy of $950. That means
    you’ve elected a worse expectancy, a loss of $950, just for the remote
    possibility of getting back to even. Yet what is the first part of the golden
    rule of trading? “Cut your losses short.” What did you pick in the second
    problem? Most people pick the sure gain of $900. Yet if you look at the
    gamble, item (b), it gives you an expectancy of $950 ($1,000 times 0.95).
    But that goes against the way most people think. They’d rather take the
    sure profit than be risky when they are ahead. Yet what is the rest of the
    golden rule of trading? “Let your profits run.”

    Now just think the OPPOSITE.
    U CAN.
    Just Day Trade like a cheetah & No overnight position. Best Wishes..

  22. Dear Anuj,
    Now just think the OPPOSITE (U have to loose money) and read the above example again.
    Now, which would you prefer?
    (a) a sure loss of $900 in first case.
    The right choice!

    Trading is The Battle Against Human Nature.

    So, just do the OPPOSITE & Choose the Path Less Traveled.

    Best Wishes.

  23. @anonymous
    So the basic thing is that you want to be a day trader...with 10 points as net profit brokerage of 5 rupees (2.5*2 ,both buying and selling)
    So that means you aim for 15 nifty points
    What's your stop loss?...probably you trade without stop loss...because if stop loss gets triggered whole mathematics of 2.5 years get messed up
    and you aim for 100% accuracy for 2.5 year and become crorepati..
    That's the system right?..It's good if it works for you...I wish you good luck...
    But everybody cant do that...not everybody cant be a cheetah ...and be a day trader..
    As you mentioned correctly that it's about Psychology..every body is we need to respect that view..that's why I encourage people to make their own rules and not follow my it works only for me
    We have to find our own "comfort zone" in this trading have probably found your...and even I have found mine what if they are long as it brigs peace of mind to us...
    Cheers ...Cheers
    Double cheers to you...

    PS...your method is very similar to Rajagopal's system...ARE YOU RAJAGOPAL?(just speculating ...that's our business...he he )
    Keep sharing your thoughts...I like new perspectives in trading :)
    Good luck

  24. How come so many guys appreciating such a stupid money management strategy....Please first you should be well informed before advising others...

    Your blog is nothing but a complete crap.......copy pasting stuff......

  25. Derar Anand Sir
    Thank you for your wonderful feedback...can you suggest some ways how it can be improved? or suggest an altogether new plan..?
    Good luck in your trading

  26. Dear Anuj,
    I like ur blog & I m no Raja or Gopal.
    I m only a prof. day trader (10+ yr exp),
    Believe me or not, I have completed above 7 steps. U r right, I trade without stop loss...
    using stoch,rsi,macd,fibo levels & daily-weekly pivot only.
    It don't needs 100% accuracy as Actual TARGET only 600 points set for 3 months (more than 60 trading days.) U can achieve that, target approx 12-15% on nifty future over 60 days.
    :- A word from a Mathematician [ :-)].
    Best Wishes.

  27. Dear Anuj,

    Believe me or not, I hv completed above 7 steps! It don't need 100% accuracy as TARGET is set for 3 months (more than 60 trading days). Above calculation is based on possible Target is Approx 600 points in 60 trading days.
    i.e., 12-15% (nifty @4000-5000) in 60 trading days. I have achieved it in day trading & u r right; I trade without stop loss, I trade using
    stoch, rsi, macd, daily-weekly pivot and fibo levels only. My Brokerage is 2.25 total, for 10 pt I need only 12.25 not 15.

    I like ur blog, Very Good Work, keep posting.

    :- I m no Raja or Gopal or RAJAGOPAL [:-)]
    I m a day trader with 10+ yr exp & a mathematician.

    Best Wishes.

  28. Dear Anuj,

    Believe me or not, I hv completed above 7 steps! It don't need 100% accuracy as TARGET is set for 3 months (more than 60 trading days). Above calculation is based on possible Target is Approx 600 points in 60 trading days.
    i.e., 12-15% (nifty @4000-5000) in 60 trading days. I have achieved it in day trading & u r right; I trade without stop loss, I trade using
    stoch, rsi, macd, daily-weekly pivot and fibo levels only. My Brokerage is 2.25 total, for 10 pt I need only 12.25 not 15.

    I like ur blog, Very Good Work, keep posting.

    :- I m no Raja or Gopal or RAJAGOPAL [:-)]
    I m a day trader with 10+ yr exp & a mathematician.

    Best Wishes.

  29. @anonymous
    Good that you have shared your strategy completely..10 years of experience is quite a bit..Did Tech bubble pulled you in stock markets?...:)
    One request ...have a profile name so that we know that this is a person and this is his strategy..other wise the strategy might get lost in infinite number of Anonymous comments in future.You can create a temporary one...most of the profile in internet are temporary...consider giving a name to your strategy...that will define your personality

    Now we know the reason behind the confidence which we saw in Anonymous words,he trades without stop-loss...hope new traders dont start with that strategy, because he has tons of experience behind that no stop loss strategy...and a day trader..many people get trapped when they enter the market without stop loss and convert the day trade into swing then to positional...and then to long term "value' investor...
    So always trade with stop loss ...till you get the feel of market and know your strategy completely like our friend Anonymous should seek complete information before adapting a new or modifying your own strategy

  30. Hi Anuj,
    It is really a good post.This system will give high probability trade during volatile and range bound market. During the trending times we could choose high beeta stocks in the direction of the trend and low beeta stocks in the opposite direction. By this way Risk can be mitigated ( of course can't be eliminated)as in any kind of business.
    Have you tested this system realtime, what emotional/execution level difficulties you faced? Your inputs will be greatly appriciated.

    I have gone through your "holy grail" list, it is awesome.


  31. Hi Subbugentleman
    Thanks for your feedback and suggestions
    I have the problem an inadequate capital listed in "disadvantage" point number 3
    It can best be practiced with a written plan
    These day I am working with that I know which stocks are going down and which up
    As you mentioned rightly...mostly we end up with high beta (financial and real estate) on one side of trend and on other side of trend its generally low beta (FMCG)
    Holy grail post that's a favorite...I check that every weekend..I will add more to this post in future just to make it more simpler!!
    Good luck

  32. Hi Subbugentleman
    Forgot to mention..
    Another problem that I encounter very often is illiquid stock futures contract...Although the stock might be in trend its very difficult to do short term trading,when the futures contract is of a low traded stock...

  33. Thanks for the clarifications. I have started using the money management plan (from yesterday) laid out by you. I will keep you updated of my real time experience ( let me observe it for a months time)....

  34. Hi Subbugentleman
    Great to know that you find it useful and using in your trading.Just two points that we should consider:
    1) how to find one stock in up and other stock in down trend ?
    2)How to identify a breakout and a pullback (need patience with this one)
    Once you find a way to identify the above ...what remains is just putting trade with your broker
    Plan should be written (most important) otherwise there is a strong tendency that we will get lost with numbers and market noise.
    Thanks again
    Good luck

  35. Thanks Anuj, I am working on writing plan. I am also looking for NSE futures support/resistance daily and weekly, SMA and stochastic for entry and exit. Looking at charts in working place is getting difficult :). Is there any place where these details is available in excel sheet. I tried icharts screener, but it is not specific to futures. Any idea ?

  36. Hi Subbugentleman
    Sorry about a late reply
    you can check this site

    he(Ilango) also gives a written well as there is an excel file that you can download right of his blog) get data of various indicators

  37. Thanks Anuj for your reference, Ilango's site had lot of helpful links and excel templates.

  38. Hi,Anuj,
    I will agree all your points...i am a TA and give tips for banknifty,we have our own software and trade based on it...The 'may-2010' we have made 1800 points in is no doubt one can have greater yield in banknifty.Aprreciate all your efforts.

  39. Hi Anuj
    GooD MM system.

  40. Hi Ravindra
    Yes it can be clubbed with any system("POTS" included).As well as any sort of investment or a loan.Any thing which has a "variable component" like asset value or interest,should involve money management,so this can be used.It is basically initiating a transaction or a trade in a staggered way.Either at two price points or at two time intervals.

  41. Thanks Anuj for reply.
    At present following ur SAR ! SHORTED NF @ 5253 SL 5310.

  42. Hi ravindra
    As we are experiencing sideways market condition...both long and short position can be justified with appropriate stop losses..Do remember that you have entered after market has fallen for some days...and US market are in over sold light...try to entry close to Low risk entry level

  43. Yes Anuj U R right. I m testing waters with Mini NFT using Strict SL @ 5310. But may cover @ 5280 on day CL. Many thanks 4 alerting me.
    Also I hv shorted OTM 4700 PE AND 5600 CE of SEP series pockting 180 pts now it is qtng 158. Last month got 40 pts on AUG position .Please comment on this strategy.
    Also this may not be the proper thread to continue commenting . Shall i continue on main home page?Many thanks and best regards.

  44. Hi Ravindra
    Very good that you plan to exit around 5280 and not at my level 5310.Just dont blindly follow any level and take responsibility of your profits and losses.It will make you a good and a confident trader.
    I dont trader in options so cant comment on this particular strategy.But I always feel that selling options is a better way to go about w.r.t options.As time decay is in favor of you.But it should be done after a "significant" rise in volatility or trend exhaustion.
    Yes you can comment on daily trades on main page,so that other blog reader may contribute as well.

  45. Beautiful post I want to continue it as much good you can. Thank you.
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