Money Management Techniques

Thursday, 12th March 2009
Lessons


“Successful traders have a larger edge and better money management than unsuccessful traders. Unlike popular belief however, this study shows that the smaller edge of successful traders is not the cause of their failure. Traders’ failures can be explained almost exclusively by their poor money management practices.” - Fernando Diaz, in Street Smarts

Money management is risk management. Risk management is the difference between success or failure in trading. Trading correctly is 90% money and portfolio management, a fact that most people want to avoid or don’t understand. Once you have the money management down though, your discipline and psychology is 100% of your success.

For Full time traders capital sizing or “Bet” sizing is essential to how long we stay in the game. There are no hard and fast rules to the amount a trader should risks for a trade but here are some steps that would essentially let you be aware of your edge:

  1. What is my capital sizing? How Much should i risk per trade? I risk only 5% of my capital per trade so if its $10,000 per trade allotment is only $500, hence The maximum loss per trade would be only $500
  2. How many positions should i take up? Follow rule no. 1 If i have a trade allotment of 5% per trade and i have 10 positions what is the maximum loss that i can incur? Answer is $5000 (500 x 10)
  3. Let your profits run and cut our your losses quickly! Many tend to do the opposite, taking profits to cover their losses. Never do that as you might be shooting yourself in the foot.
  4. If you are currently in position never take up another opposite direction with a bigger sizing than the first one, you are just digging a bigger grave

Please adhere to the rules above and remember for every trade keep minimal losses in sight and maximise your gains!

Happy trading!




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