Money Management

The traders who enjoy the greatest amount of success are those who have established clearly-defined rules of money management to govern their trading. Money management involves determining how much of your overall portfolio you are willing to put at risk in any one trade, where you should put a stop loss and what trade size to choose..

A key part of becoming a successful trader is the knowledge of money management. Without a proper understanding of Money Management is and is not, you can have the best trading systems and still blow your account out of the water. 

Position Sizing™ and your personal psychology are the two most important aspects of trading and they are probably the two most neglected topics. Chapter 14 of the second edition of Trade Your Way to Financial Freedom, is all about helping you understand the importance of position sizing.
Before we discuss this topic, let me give you some important background information. I tend to think of trading systems by the distribution of R-multiples that they generate. And the average R (or mean R) of the system's R-multiple distribution is the expectancy of the system. It tells you what to expect from the average trade.

I recommended that you always have a bail-out point before you enter into a trade, but if you haven't done that then you can look at old trading results and use your average loss as an estimate of your initial risk. I then gave you an assignment to determine the R-multiples for your trading over the last 12 months. Furthermore, I gave you a sample of data shown in the table below.

One of the cardinal rules of good trading is to always have an exit point before you ever enter into a trade. This is your worse case risk for the trade. It's the point at which you would say, "something's wrong with this trade and I need to get out to preserve my capital."
Most sophisticated traders will have some sort of exit criteria that they like. However, if you are a novice and you just don't know, then I'd recommend 75% of your entry price if you are an equity trader. That is, if you buy a stock a $40, then get out if the stock drops to $30 or below.