Money management is probably the most important and most overlooked part of building a successful career in trading. I often say that a successful trader is actually a risk manager, and although we all think it is about entering a trade, managing it is far more important. However, you must have confidence in your trading system otherwise you will fail. You may be surprised to read that more than 40 per cent of traders do not use any form of risk management at all (i.e.: no stop losses), and most have no particular trading. More than 80% of new retail traders would get wiped out within the first 9 months of trading. So how do you protect your capital and still make money?
The components of good Money Management are as follows:
Minimize Losses
Your number one goal should always be to Minimize Losses. When you understand risk and the permanent damage that large losses can cause to you trading account, you’ll realize that Consistency is the Key. As seen in below image Key is to control your losses and never ever marry your trades.Understanding the Risk Management is the most crucial part in trading apart from Trading Methodology.
Once you’ve laid the foundation of risk control and understanding, you will automatically see the importance of the right money management techniques. If you are a Day Trader SL/TSL locked in your trading system not in your mind as a Trade Moves in Your Favor. If you don’t, you will inevitably suffer a devastating loss that you cannot recover from without adding money to your account. Spend some time in reviewing the below image and try to connect your trades with it. You must have gone through similar situation many time when you never followed your Money Management.
In addition, too many people place stops haphazardly. Instead you should Always place stop loss based on your trading methodology which you should back test for a period of 1-2 years ,do your homework before taking live trades, More you back test better you will get adapted to various scenarios which can arrive over a period of time.
Always remember these age old Stock market adage, Let Your Profits Run. But don’t fall in love with any trade you’re in. When in Doubt, Stay Out or Get Out; Do Not Get Back in Until You are Sure About a Position. Remember that there are always plenty of opportunities on the horizon.
Follow News But Avoid Trading based on News
Be careful how you interpret what you read in the paper or watch on CNBC. Price Makes News, News Does not Make Price. So once news comes out through any public venue it is likely to already have been discounted by the markets. In fact, news often means the opposite of how it appears on.
One of the most important things you must start doing today, if you haven’t already is: Keep a Trading Journal and Review and Evaluate Your Past Decisions Periodically. I realize that many traders start doing this, then it becomes a mundane, boring task and they fall out of the discipline. Well, don’t always expect journal-keeping to be fun. Just do it!
Invest in yourself. – Learn new things, Learn Yoga Meditation. Keep learning Keep Growing.