Basics of Money Management

Basics of Money Management

Basics of Money Management

An intro into how to balance your own personal trading books

Money management isn’t something that directly springs into mind when people start to get into trading. It sounds too conservative, too “my dad does that.” It just doesn’t have that sizzle to it like breakouts, volatility and profits. The thing is though, without proper management, your money is quite likely to evaporate even if you do manage to develop as a trader.

Why is it so important? Because it’s actually the first thing you do before any trading starts – you decide how much to deposit. Here is our first tip on that matter – always trade with money you can afford to lose. It’s a different number for different people, but it has to be a sum that if lost, wouldn’t influence your everyday life negatively.

You can even preset different conditions in terms of saving, or times of the year/month when you can deposit. Withdrawal conditions should be the same – managing profits is as important as managing losses.

The influence this has on novice traders is that it lets them have a more calm approach to learning how to trade, what the markets are and possibly testing different strategies out. For both novices and battle-hardened veterans it has an additional benefit – it takes the edge of trading, which is always good when making your picks.

Once you’ve deposited a certain amount into your account, comes the time to divide it into equal bits, each of which will be used for your trades. There are many discussions on how much each of these should be. Usually it starts from as low as 1%, but can reach levels between 5% and 10% depending on your system of trading. We would definitely advise against changing the size of your trades, especially if you’re in a testing or educational phase.

Our personal pick is either 1% or 2%, resulting in a sequence of 100 or 50 trades, that you can review and interpret after they finish (it’s nice to have round numbers when dealing with money). This way you would have to have some very significant losing runs, if you were to deplete everything you’ve deposited (of course it also limits your potential profit).

Professional traders and funds also use diversification as a trading style. This is related to money management, as the different directions, instruments and timeframes take up different amounts of money from their funds. Institutional investors are even more focused on this, investing in tens, or even hundreds of different assets, but of course this is quite far from the reality of everyday traders.

This is more of an individual decision, whether it would be trading in two-three instruments for short timeframes and getting to know them better, or reaching 10-20 instruments, most of which have long term picks.

All these actions are geared up towards one thing – preparing yourself for the worst case scenario – a long series of losses. It’s based on the important premise that capital preservation is actually, as important as capital gain. Or simply said – living to fight another day.

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