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Money management is so important we
would emphasize that it is probably THE most important element of
trading.
Some people experiment with systems, tips and
other market entry techniques, but with proper money management they are
safe since they never get wiped out if they are wrong.
Most good money management principles
can be learned through simple math and market logic.
Trading experience is the key, as it allows
you to scale in and out of trading positions and actively manage risk.
When the market goes very favorably in your
direction, lock in some profits at certain points because the market
will eventually retrace. Then if the move is still valid, you can enter
the market again with a tighter stop, and scale back in your position
never exceeding the risk exposure for your whole trading account.
This is why even a trader with no system, but
with solid money management principles in place can better play
the market than a person who has a higher accuracy system.
The trading capital is under control by being
leveraged properly and keeping far away from the risk of ruin.
Market conditions change, and past
performance in the trading systems can be deceiving, especially due to
the fact that data can be curve fitted (to easier sell the system).
It's like buying a used car that has
meticulous records on paper, but it's far from an ideal driver that also
has many flaws discovered upon a closer inspection.
Money is inventory for your trading business,
and it helps to treat it differently from real life applications. If you
associate your trading capital with money in the bank account it will be
difficult to trade properly.
You need enough trading capital to
have some breathing room for live trades and for entering other trades. |
