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

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