One of the most important areas in trading is Money Management. However it is also one of the areas that beginner did not put in much time to understand.
Good management of money separates a beginner from a professional trader.
It is the different between traders that make consistent profit and traders who losses all their capital to the market.
You must know that anyone can make money on a single trade or a number of trades in the trading world.
However there are very few traders that can consistently make profit and grow their equity.
Why is that so?
That’s because the capital of traders without proper strategies on managing money may be wipe out from a single disastrous trade or a series of losing trades. It is hard for the traders to restore back to their initial trading capital after the losses. This is especially so as no matter what percentage of capital you lose, you need a greater percentage of gain to breakeven.
The goals of managing money are to increase your equity by reducing losses from losing trades and maximize your gain from your winning trades.
Therefore you should restrict any trade losses to a small faction of your overall trading capital. However, how much is consider “a small faction”?
A general rule of thumb is to limit your losses to a maximum of 2% of your trading capital per trade. This is commonly known as the 2% Money Management Strategies
If you have a series of losses during the month, the 6% Rule will stop you from trading and force you to review your trading system.
You may also apply various Options Strategies to limit your risk per trade to a predetermine amount.
The other key goals of managing money are to let you concentrate on trading and not worry on losses. If you start to put on trades whose size is making you nervous, your performance, judgment will be affected and you will begin losing.
Follow your rules on managing money as if your life is depending on it.
Because it actually does!
You must know that once we loss all our money, we die as a trader.
Good money management helps you to survive in the market. It is a slow process and takes time to learn and implement. Respect money and treat every dollar as a seed. You will never know which one will become a tall money tree that bear fruits for you months after months.