Money Management

Money Management

How much do you know about Money Management?

As we begin the course, I thought it would be fun and informative to start this week's topic with a short quiz. The purpose of this is to help you to evaluate your strengths and weaknesses so that you know exactly what issues you have to concentrate the most on. Are you ready? Let's go!

Begin the quiz

1. It's important to use a stop-loss the vast majority of the time. But
there are certain market conditions under which you should not use a
stop-loss. Which of the following are they:

1. Immediately after I've entered a trade
2. A highly volatile market
3. Runaway markets
4. All of the above
5. None of the above The correct answer is: e) None of the above. You should use stop-losses no matter what. Find out why in Rules 1, 2, 4, 5, and 6.

2. If I made a series of bad trades and my account losses 70% of its
value, I have to show a return of how much before I get back to break­
even?

6. 45%
7. 70%
8. 140%
9. 230%

The correct answer is: d) 230%

Large losses can have a devastating affect on your recovery ability. That's why it's important to never have them in the first place.

Find out more about this in Rules 1, 2, 4, 5, and 6.

3. True or False: If a trading strategy has earned an average annual
return of 120%, it's average maximum drawdown is irrelevant because
no matter how large it is, the strategy will always make up for it.

The correct answer is: False.

Drawdown is always important and can affect your profit potential dramatically no matter what the "average total return" is.

Find out more about this in Rules 1, 2, and 3.

4. The world's most successful traders do which of the following most
often:

10. Buy at market bottoms and sell at market tops
11. Trade in the direction of trends of the strongest or weakest markets

The correct answer is: b). The world's most successful traders trade in the direction of trends in the strongest or weakest markets.

Find out more about this in Rules 12, 13, 16, and 17.

Next Question

5. True or False: A stock's fundamentals (or business outlook) are irrelevant to short-term traders. That is, a short-term trader should only look at technical factors when deciding whether or not to take a trade, not a company's balance sheet

The answer is False.

Find out more about this in Money Management Rule 3, Trade With Fuel on Your Side

6. If you want to improve your results as a trader, your main goal should be which one of the following:

12. To understand the markets
13. To develop a set of mechanical trading rules, which back-tested over a period of years, produces maximum returns
14. To read articles in trading publications to find trading systems that meet your minimum profit objectives

It is most important to understand the markets so that no matter what happens, you'll know what trading strategies work and which don't work. Find out more about this in Money Management Rule 3.

Next Question

7. Take a look at the following table:

Year	Trader A Annual Returns(%)	Trader B Annual Returns (%)
1	21	18
2	35	18
3	20	18
4	-26	18
5	32	18
6	12	18
7	42	18
8	-16	18
9	31	18
10	56	18

Trader A: Average Annual Return = 20.7% Trader B: Average Annual Return = 18%

Which trader made the most money by the 10th year?

a) Trader A

b) Trader B

Trader B made more money. Find out why in Money Management Rule 2.

That's it for the questions. I hope you found this quiz enjoyable. Now let's get started and learn more about Money Management.