Money Management Strategies
The 6% Rules

Trader apply the 2% Money Management Strategies to protect their account to be wipe out in a single disastrous loss. However if you are in a bad month and are in a losing streaks, a series of 2% capital losses can also bankrupt your trading account.

 

Therefore you need to limit your monthly draw down to about 6% of your trading capital. 

This is commonly known as the 6% Money Management Strategies.


When your current month accumulated losses plus the risk of your existing trades expose you to a total risk of 6% on your last month account closing balance, this rule kicks in and stop you from trading for the rest of the month!

If you have made a cumulative loss of 6% on your account within a 4 weeks period, stop trading. It means that you have to go back to paper trading to ensure that your analysis or trading system is still correct.

Steps of 6% Money Management Strategies

  • Review your account daily. Add up the market value of all your current open trades with cash on the account.
  • Once your daily account value dip below 6% from where it stand on the last day of the previous month, stop making new trade for the rest of the month.
  • Keep an eye on the current open positions closely. Once it hit your profit target or stop loss limit, close it.
  • Spend the rest of the month monitoring the market, track your favorite stocks and paper trade.
  • Review your trading system as well. Analyse if this losing steak is due to a pure bad luck or is it exposing a flaw in your trading system.

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    If you perform well and your account size glow, the 6% rule will enable you to trade a larger trade size in the next month.

    If you perform poorly and the account size dropped, it will stop you from trading early in a losing steak.


    This 6% strategy encourage you to increase your trading size when you are in a winning steak and reduce it if you are having a series of losses.


    This will enable you to survived in the inevitable drawdown, review your trading system, learn how to trade through live experience and eventually generating a consistent profit months after months

    Next look at why limiting losses is important in your trading careers in Money Management Tips

    Return from Money Management Strategies to Money Management In Trading

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