Why Money Management and Commissions Matter

The most important thing in trading is money management.

Take for example our fictional trader Joey.

          \O_ ... {I want to be a trader!}
       ,/\/
        /
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Joey has a decent job and has been saving his pennies to invest. He has finally  accumulated enough wealth to open a $5000 account at a popular brokerage he saw advertised on CNBC.

Joey is paying $7 per trade.

After spending months paper trading, reading popular financial websites and books Joey feels ready.

When the market opens on Monday Joey goes out and buys 100 shares of stock XYZ at $10. What's the problem here?

Well it's pretty simple, Joey invested 100x10 = $1000 in one position. That accounts for 20% of his portfolio. Furthermore Joey is automatically down $14 which may not seem like a lot but it is 1.4% of his current position.

Hence our fictional trader Joey is already a loser on his first real trade ever and has invested 20% of his portfolio in one particular position.

I used to be like Joey several years ago, and I think most traders are.