Money Management (II)

30 Nov

As you saw in the last post that calculating right trade size is a relatively simple process.  Even so most traders don’t bother doing it until they suffer large losses and then decide to learn more about money management.  New traders concentrate on the result or the outcome of the trade, on the other hand professional traders ask themselves “how much can I afford to lose on this trade?”  The sooner you realize that outcome of every trade is different and beyond your control the sooner you would acknowledge the importance of sound Money Management.

A winning system is usually not more than 60% successful.  Even though you find one with 80-90% successful system on the paper, when you trade it usually come down 60%. In fact I think it is a blessing in disguise.  What it means is that we don’t have to wait for Holy Grail to come along before we can start making profit.  There are several systems available which works superbly if traded with right Money Management.

So if we are losing at 40% of the time it is essential that we control risk. Every time we lose we need to make sure we don’t let it run and cut the loss when we reach the risk identified earlier.  Trading with improper trade size and variable risk every time would result in account wipe out sooner than you would think.  The ability to come back next day and trade more is what creates a successful trader in long run.



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