As a trader, you need to realize just how important money management in trading is. In fact, it’s virtually impossible for anyone to build a successful trading business with proper trade money management.
The skills you require for successful trading are skills you have to learn. Nobody is born a trader. Instead, together with a well tested plan, it requires a huge amount of discipline and an extremely strong will. Even one of the top trading gurus, Dr Van Tharp, states that successful trading is all about mindset and psychology.
For example, let’s say some of your trades aren’t going as planned. Many traders, new traders in particular, would let their losses run in the hope that market conditions change before they loose everything. While this may seem like the best thing to do, the number one rule of trading tells us we should be doing the exact opposite - “cut your losses and let your profits run”. Of course this may sound obvious but please believe me, when the pressure is on; you’re going to need a good trading psychology to see you through.
You need to be capable of going against the grain if you’re to win in trading.
You need to realize that without proper trade money management at the centre of your system, one bad trade could spell absolute disaster. Sure, a perfect system should always be 100% accurate but I can assure you they’re not always accurate, so yes, one loss could mean you loose everything. Contrary to what you may have heard its trade money management that makes a solid system, rather than a market full of money making opportunities and magical trade entries. The bottom line is; trade money management protects your capital.
Given the extreme importance of trade money management, I would’ve expected to see many courses dedicating whole chapters to the subject and yet I’ve never seen one that does.
No, I’m not claiming to be the first person to discover the importance of proper trade money management. In fact, one can read story after story where traders acknowledge the fact that their success is due to trade money management. What I am saying though, is that you need to apply it, no matter what system you use. Irrespective of the markets you trade in, and irrespective of the methods you choose, there can be no exceptions.
In the vast majority of cases where traders are under-achieving, the primary reason is lack of discipline, with regards to the rules of meaningful trade money management. This is hardly surprising though because actually applying these rules, is a far cry from simply being aware of them.
Remember, change can come about anytime, no matter where you are with your trading. In fact, it only takes a single new idea in order for losses to become profits.
It needs to be made clear that the benefit of having a proper system set up is that you’ll have no need to rely on a full-service broker. Likewise, you’ll no longer need the advice of gurus.
Essentially, you need to be confident that when you decide to enter into a trade, you have a well thought out exit strategy in place, and that risks have been tailored accordingly with regards to your risk tolerance. This not only allows you to manage your portfolio in as little as five minutes each day, but it also ensures you can sleep peacefully at night.
Above all, you need to believe in the importance of good trading money management and that if implemented correctly, it will make it possible for you to achieve your goals. Because this article is intended only to be an introduction, I’ve only covered the tip of the iceberg with regards to managing trade money. However, my upcoming articles will delve a lot deeper as I aim to help my readers master the markets with masterful trade money management.