Money Management


Controlling your risk

Successful speculation is all about managing risk. A winning trader always knows how much they will lose, but rarely know how much they will make. The key is to never let a single trade or single event (that may impact on multiple positions) have a major negative impact on the trading account.
"Never, ever, trade without a stop-loss order. If you don't know what a stop-loss is, you should not be trading."

Money management

A basic investment tenet states there is a direct relationship between risk and return. Trading is no different - the greater the account value risked on a single trade idea, the more volatile the total returns from the trading strategy will be.

A simple strategy is to never risk more than 2% of your trading account on a trade. Most professional money managers will risk a fraction of 1% on a single trade.
"There are many bold traders, but there are very few old, bold traders".

Basically,we use money management rules to restrict how much the market can take away from us. Certain rules that we follow with discipline.Rules that are written and implemented trade after trade,again and again.Rules that help us to stay with the trend and to let profits run as long as possible.Rules that trigger off small losses as compared to the big profits.

Like a warrior,this is the Code that a trader swears by,and adheres to,come what may.

If his stop is triggerred,he is out,he does not sit there reasoning that the economy is growing 15%,and the fundamentals of this company is great,and that it is expecting good earnings…………If the stop is hit,that's it.He/She's out of that trade.All thought therefore goes into the trade BEFORE the trade.No more thoughts after the trade has been set in motion.

The mind is set into "NOW" mode,no more planning ,no more thinking.When the stop is hit,the trader is out,………..and that's that!
But,there is more to money management other than stops……..stops is an aspect of it.But there is more…..
But before getting into it,just noticed that there always is this great amount of blabber about the number of wins a trader has had,etc etc……………So before getting into things,felt that we all should realise one thing.We are in this business to make profits,we are NOT in this business to win…….you can have a Batting Avg of 95% and lose out when you look at profits and losses.You can have a Batting Avg of 30% and come out with stupendous profits by the end of the month.

How is that possible?
Well,presume you make an average of Rs200 per trade for 19 trades,and lose Rs5000 in the 20th trade,well,you are sitting pretty with a 95%batting avg and a loss at the end of the month.
Presuming that you have made losses in 14 trades,an average of Rs 400 per trade,and we made Rs10,000 in the other 6 trades,well,we are sitting with a profit at the end of the month although we have been wrong 70% of the time.

So,it's not about about the number of wins that one makes,it's all about making profits…………and that verily is the heart and core of money management!

The Difference between the professionals and the novices.

The "Professionals" fit the following profile

They trade completely objectively using mathematical models to arrive at trading decisions, there is no emotion involved;
Their ideas are well researched to ensure their strategy has a definable edge;
They follow trends in prices, by controlling their risk and allowing profits to accumulate;
They realise the market is not predictable, so employ techniques that will profit by recognising trends, rather than anticipating them.

The "novices" fit the following profile

Their trade strategies are usually based on esoteric analytical techniques that are highly subjective, making it difficult (if not impossible) to determine the provision of an edge;
They have a pre-occupation with forecasting prices or dates on which trends in the markets will reverse (ie a belief that the markets are predictable);
by design, their subjective strategies make a disciplined trading approach difficult as it is too easy to "bend the rules";
They pay little attention to risk control and money management.