It is a common assumption that most traders lose money, while winning traders are few and far between. But what sets these winners apart from the masses? It isn’t the ability to pick tops and bottom or finding right entry and exit , but rather an understanding of money and risk management.
Money management is the most overlooked area of trading, Many traders think just having a sound strategy will make them money but its totally wrong. The subject is often overlooked because it is misunderstood, and frankly, it sounds boring compared to a discussion of stochastics or technical analysis. However, it is critical to any successful trading plan.
Strategies evolved over time, it is not the strategy that makes money; it is everything you do around it that does.you can have the best strategy in the world, but still blow out with a bad money management strategy. As the age old adage goes Strategies never make money its the discipline of traders which make money.
Even a trading plan as simple as a moving average crossover system can be a net winner when money management is applied. This discussion of money management will build a foundation of concepts that can be applied to any trading plan.
Traders require the discipline to do nothing when there are no opportunities present but must still stay alert for potential opportunities. Then, they need the discipline to act instantaneously when trading opportunities occur. Once in a trade, traders require discipline to follow their trade plan.
As a trader, your money management strategy is the one variable that will give you the biggest edge in trading . You cannot control the markets but you can control your money and your risk on each and every trade that you make.
Your money management strategy answers these questions:
- How much money should I risk on this trade?
- How many shares should I buy?
- When Should I Stop trading in Profit and Loss.
You could also think of this as being thick-skinned. The market will constantly throw losing trades at you, and you need to bounce back. If you feel discouraged every time you lose a trade, or your strategy fails to produce the result you expect, your life will be miserable. Losing trades are a constant; most successful traders will have losing trades every day. Trick is always Keep Losses small and never get emotional towards your trade.
The difference between a successful trader and an unsuccessful one is that most successful traders win slightly more on their winners than they lose on their losers and typically win slightly more often than they lose. If your wins are much bigger than your losses, you may only need to win 30 percent or 40 percent of your trades. Other traders may win 60 percent or 70 percent of their trades, but their wins may be equivalent to, or only slightly larger than, their losses. In either case, losing trades happen.
Losing streaks WILL occur. It requires a mental toughness to stay focused on executing the trading plan or to realize that the market isn’t providing you with good opportunities for your strategy.
A trader must withstand a continual barrage of punches from the market. Losses are a fact of trading, but it’s we how we act, instead of negatively reacting, after some tough trades that makes all the difference. After taking losses, move on, and continue following your trading plan. If you are following your plan, but you just keep losing, market conditions likely aren’t right for your strategy. In that case, walk away until they are. Sometimes being mentally tough means making the hard choice of not trading.
Being the first one in the pool is not needed to make a lot of money. Waiting for 15 to 30 minutes at the start of the trading day will allow the trader to view the markets and individual stocks with a clear mind. Notice what stocks are up and which are down, are your stocks doing what you thought they might do and write down some notes on levels and make your list of strong and weak names that you will go to when the market makes a strong or weak move.
Traders require patience in waiting for their ideal entry and exit points (based on their strategy), but when the moment calls for it, they need to act swiftly. There is a constant seesaw between prolonged periods of patience, followed by split-seconds of action, which are then followed by patience, and so on.
Make sure the markets that you are trading in fit with your account size and risk tolerance. Make sure the percentage you are willing to risk per trade fits the plan and the market. And remember that none of these components exists in a vacuum. Focus on one without the other and you are headed for trouble. Weigh these factors together and you will be putting yourself on the track to building a successful trading plan.
Happy Trading ,