The Best Money Management Strategy
By Trading Secrets
Setting your Maximum Loss is good Money Management
After defining your trading float, the next thing that you need to do
in setting an excellent money management strategy is to define what your
maximum loss is. The maximum loss is quite simply the maximum amount of
capital that youre happy to lose on any one trade. The reason for defining
this upfront, before we even open a trading position, is to make sure
that we can stick to one of the cardinal rules of trading and that is
to keep our losses small ensure that you abide by your money management
We want to make sure that we set what our maximum loss is and make sure
thats a small percentage of our trading float so it wont have a detrimental
affect if we have a string of losses. If 95 percent of traders end up
losing money, the primary reason for this is because they havent applied
proper money management strategy.
Lets look at an example of poor money management strategy. If I had a
trading float of only one thousand dollars, and Id began trading risking
100 dollars, with most trading systems, it could be very reasonable to
experience three losses in a row. If I were risking 100 dollars, obviously
my trading capital would have now reduced to 700 dollars.
Now, what do you think those 95 percent of traders with poor money management
strategy say to themselves at this point in time? They go, Well, Ive
already had three losses in a row. So, Im really due for a win now.
And, thats when they decide theyre going to bet 300 dollars on the next
trade because they think they have a higher chance of winning.
This just isnt the case and I suppose we could draw parallels back to
the story before, when I was talking about going down to Crown Casino
and I was waiting for a string of blacks in a row and then I would bet
on red. Effectively, this type of trader that Ive just described is ignoring
their money management strategy and doing the same thing. Assuming that
person did bet 300 dollars on the next trade because they thought they
were going to win, if they lost this time, now their capital would be
reduced to only 400 dollars. The chances of making money now are very,
very slim. Theyll need to make 150 percent just to break even.
Similarly, heres another example of poor money management strategy and
a perfect illustration why most people lose money in the market. If we
again, start out trading with 1,000 dollars, and we begin betting with
250 dollars, then after only having three losses in a row, weve now lost
750 dollars, and our capital has been reduced to 250. Effectively, we
must make 300 percent return and thats just to break even.
In either one of these cases, the reason for failure was because the
person risked too much and ignored their money management strategy.
Remember, the goal here is to stick to your predetermined money management
strategy and to keep your losses as small as possible while also making
sure that we open a large enough position so we can capitalize on
profits as well.
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