It is a common assumption that most traders lose money, while winning traders are few and far between. But what sets these winners apart from the masses? It isn’t the ability to pick precision entries, but rather an understanding of money management.
Money management may be the most overlooked area of trading. The subject is often overlooked because it is misunderstood, and frankly, it sounds boring compared to a discussion of stochastics or technical analysis. However, it is critical to any successful trading plan.
Strategies evolved over time, it is not the strategy that makes money; it is everything you do around it that does.you can have the best strategy in the world, but still blow out with a bad money management strategy.
Even a trading plan as simple as a moving average crossover system can be a net winner when money management is applied. This discussion of money management will build a foundation of concepts that can be applied to any trading plan.
A money management plan will help you in another key area – discipline.
prevent the balance of emotions, fear and greed,
As a trader, your money management strategy is the one variable that will give you the biggest edge in trading . You cannot control the markets but you can control your money and your risk on each and every trade that you make.
Your money management strategy answers these questions:
- How much money should I risk on this trade?
- How many shares should I buy?
The SL 2% rule
Most traders would agree that you should not risk more than 2% of your trading capital on a single trade. The stock market is mostly random. No one else is going to tell you this, but this is the reality of trading stocks.
So no matter how good the chart looks, there is a chance that the stock will not go in your desired direction and you WILL lose money on the trade. How much money will you lose if this happens?
On the first of each month, look at the total amount of money in your trading account. Let’s say you have 3,00,000 Rupee. 2% of this amount is Rs . 6000.00. That is the maximum amount you can lose on a trade.
Make sure the markets that you are trading in fit with your account size and risk tolerance. Make sure the percentage you are willing to risk per trade fits the plan and the market. And remember that none of these components exists in a vacuum. Focus on one without the other and you are headed for trouble. Weigh these factors together and you will be putting yourself on the track to building a successful trading plan.
Happy Trading ,