If I had to pick one aspect of trading that was most important besides your psychology when it comes to trading success, it would have to be Money Management. After all, it is the only aspect that will determine whether you grow your capital slowly or fast as well as protect your account from catastrophic loss. After you have successfully developed the skills and a trader’s mindset, a good money management strategy is crucial to your success.
What is Money Management?
- Money Management is a strategy for increasing or decreasing the position size to limit risk while achieving the greatest growth possible from a trading account.
- It will determine when to increase or decrease your position size.
- A proper money management strategy addresses both the risk and reward factors of an account.
- Money Management is focused on one thing alone, and that is Account Performance!
For this strategy, we are going to use a percent risk out of the whole capital allocated as a position size. Few tests have been conducted regarding position size for this strategy and the fixed one is the best one for now. What does a percentage of the capital mean? For each trade, we are going to risk a percentage out of the whole capital. For example, at 1% at 10000$, we are going to be able to risk 100$ on that specific trade.
Until we have mastered the strategy we keep this one and later on we might be able to optimize it to our trading style and then also change the position size to a different one.
Trader’s Mindset:
Learn how to think in probabilities. There are many contradictions, conflicts, and paradoxes in thinking that will cause you to assume that you already do think in probabilities when you don’t. You must trust your edge which gives your trades a higher probability of one outcome over another. Your confidence in your edge will result in you developing a winner’s mindset.