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Proper Money Management may be the holy grail for trading

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Do you have extra money to burn ?

Not me !

There are 101 theories out there on how one can profit in forex, stocks, oil and more.

I personally believe that there is 1 theory which is essential and critical.

Proper Money Management. ( MM for short )

MM is all about knowing what exactly are you risking per trade and making sure that risk is acceptable to your capital.

If you pray, sweat, scream while trading, you are probably risking more than you should.

Lets look at an example of a consecutive 5 losing trades.

Person A risking 10% of his capital.

Trade 1 : $1000 – $100 = $900
Trade 2 : $900 – $90 = $810
Trade 3 : $810 – $81 = $729
Trade 4 : $729 – $72 = $657
Trade 5 : $657 – $65 = $592

After simply 5 trades, he is down almost 40% of his account !

Person B risking only 2% of his capital.

Trade 1 : $1000 – $20 = $980
Trade 2 : $980 – $19 = $961
Trade 3 : $961 – $19 = $942
Trade 4 : $942 – $18 = $924
Trade 5 : $924 – $18 = $906

After 5 trades, he is down slightly less than 10% of his account.

Definitely not as punishing as A’s experience.

This is not the end.

The more you lose, the more you need to win to get back to break even.

Person A

Capital $1000
Current $592

He needs to win an extra 68% or so from $592 to break even.

Pretty tough if you ask me !

Person B

Capital $1000
Current $906

Simply gain 10% or so from $906 to break even.

My question to you is

  • Can you avoid losing 5 times in a row?
  • Are you ok to lose a whopping 40% of your precious capital just after 5 trades?
  • Are you confident to make a good trade of 68% profit?

To sum things up,

before you trade, always make sure

  • you choose a manageable risk percentage
  • you position your trade around this manageable amount
  • you stick to your plan and never deviate

The key to success to trading forex, stocks, oil, etc in my opinion is not making big overnight.

It is to survive long and learn about the markets and techniques while preserving or gaining capital.

Cheers and trade safe !

( Part two of this money management series talks about margin, leverage and margin calls. )

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