This is an excerpt from the Liberated Stock Trader Professional Stock Market Training Course, Chapter 15 – Making the Trade – Section 4 – Part 1 – Cash Allocation.
Making the trade – Cash Allocation
We have covered stop losses and elements of risk, we also covered how many stocks to purchase, and now we are looking at how to allocate your money to stocks. Otherwise known as betting styles, cash allocation is important to understand. There are two approaches, Martingale and Anti-Martingale. They help us understand cash allocation strategies.
The Martingale Approach
Before I understood the term “Martingale,” I had worked out a way to win at roulette. I thought it was highly original until I learned that any top-level trader or professional technical analyst understands this approach. When I was younger, before I found the stock market, marriage, and children, I enjoyed a regular night out at the casino with friends gambling a small amount. I used to go with $50 dollars in my pocket and utterly refuse to gamble any more money. This was play money, and when it was gone, it was gone. My strategy paid off quite well when it worked, but when it did not work, I went bust.
My strategy was to only bet Black or Red, if I won, I won double. If I bet $2, I won $2 and got my $2 stake back. If I lost, I would double my next bet to $4, so that if I won, I would win back my original loss. The idea was that I could sustain with $5, 5 straight losses before going bankrupt. But by constantly doubling my stake, I only needed one win to come out ahead.
Quick Tip: On a losing streak, do not double your betting size to recover your losses in the Stock Market.
This I now know is called the “Martingale Betting Strategy,” and it certainly is not recommended for the stock market. When it worked, it was good, especially if lady luck was on my side, but if I hit a losing streak, I was broke. Sometimes I would come out with my money doubled, but sometimes I came out with nothing. If you adopt this approach in the stock market, you may do well for a period, but all it will take is to go bust once, then you have no money, which means you have to leave the table. In the example above, after my 5th successive loss, I was one bet away from bankruptcy.
This chapter goes on to discuss in detail:
- How to track your trades
- How many stocks to own
- Timing and Stop Losses
- Risk reward
- Setting price targets