Money management plan is the most important requirement for stock trading. You have to survive in the market and preserve your capital. This is possible only with a sound money management plan. There are many money management software available in the market. You will find priced software and also free software downloadable from the internet. As a beginner, it is my advice, you should not rely on a software to manage your money. As one who is new to trading you will be having a capital of nominal value which can be easily managed by you. Secondly, doing it on your own will make you understand the nuances and techniques of money management. You have the freedom to define your own money management strategies.

The first step towards creating a money management plan is to decide upon the capital you will be using for stock trading. This capital should come from funds not kept for some other purpose. It is not advisable to use borrowed money for stock trading. You should also not use money kept for meeting some other liability for stock trading. I used to arrive at the capital required for my trading activities based on the following information.

• Identify the kind of trading I am going to do. ie., equity trading for delivery, options trading, futures trading.
• Identify the shares and the number of shares I will be trading. For equity trading most of shares trade in market lots of 100. For options and futures you have find out what is the minimum trading lot for the identified shares. You should also find out the margin requirements if it is futures trading and the premium requirements if it options trading.
• The number of trades I will keep open at a time. Depending on this I will calculate my investment.
• The stop loss limit. These are the levels at which I will exit from a trade, if my trade goes against me. In this way I can reduce my losses and preserve my capital.
• Expected ratio of profit making and loss making trades. Say, out of 10 trades you may expect 6 profit making trades and 4 loss making trades. No trader can say that all his trades are going to earn profits for him. I fix a ratio of 60:40 as my profit trades to loss making trades ratio.
• Based on the profit target and ratio of profit trades to loss making trades I decide upon the number of trades. The amount of profit or loss for a trade is based upon the exit limit for profit trades and stop loss for loss making trades. Let us presume the profit:loss making ratio is 60:40 and my profit buget is 30000 per month. As per this ratio, roughly, for every five trades I make, two will make a loss and three will earn a profit for me. I fix a stop loss limit at Rs.2000 and I will exit the trade when my trade crosses Rs.4000 in profit. With this plan, to earn a profit of Rs.30000 per month I will have to do 19 trades in a month.

A sample money management plan for a month

Expected Odds %age 60%
Expected Profit per trade = 60 * 4000 /100 = 2400
Expected Loss per trade = 40 * 2000 /100 = 800
Expected Net Profit = 2400 - 800 = 1600
No of trades = 30000 / 1600 = 19

Monthly Profit Target = 30000
Profit per trade = 4000
Loss per trade = 2000
Expected Profit per trade = 2400
Expected Loss per trade = 800
Net Profit = 1600
Total Trades reqd = 19