10 Rules of Money Management
You may be
filled with knowledge about trading or have a sound trading system using the
latest technical indicators, but most professional traders will tell you that
the single, most important factor in trading success is using good money
management principles.
A higher
percentage of winning trades or yet another trading tool may be helpful, but if
you do not have a good money management plan in place for trading, you are not
likely to remain in the trading game very long.
You need to
develop your own money management program for entering and exiting markets,
sizing your positions, etc. based on the size of your account and your trading
style, but here are some principles to guide you, listed in no particular order.
1. Bulls make a little. Bears make a little. Pigs get slaughtered.
In other words, do not be a greedy trader. If you are a bull, don't expect
to get in at the bottom and out at the top.
If you are a bear, don't expect to pick an exact market top and ride a market
all the way down to the lowest low.
Thinking otherwise allows the destructive "greed" emotion to take over. Greed
has been the ruin of many traders.
2. Any fool can get into a market, but it's the real pros that know when to
get out.
Indeed, market entry is certainly an important element of successful
trading.
However, exiting the trade is paramount. Many times a trader will allow a market
to "go against" him or her for way too long and way too far - meaning big trading
losses.
3. Use protective buy and sell stops.
One of the major mistakes many traders make is not using protective buy and
sell stops when they enter a trade. Or, traders may pull their protective stop,
"hoping" the market will turn in their favor.
Don't be fooled into using "mental stops." Determining where to place protective
buy and sell stops BEFORE market entry is one of the best money-management tools
available.
4. Don't put all of your eggs in one basket.
Using a large percentage of your entire trading account for one trade is
unwise.
Remember that even professional traders will have more losing trades than
winning trades over time.
The key to success is minimizing losses on the more numerous losing trades and
maximizing profits on the fewer winning trades.
5. Cut losses short. Let winners ride.
Using a pre-determined protective buy or sell stop will cut your trading
losses short.
Using a trailing protective stop on trades that become profitable will allow you
to maximize profits on the winning trades.
6. Only the markets know for sure.
Don't ever think you "know" what a market will do at any given point in
time.
One of the biggest advantages for sound money management is "knowing that you
don't know" what a market will do at any given time.
A recipe for trading disaster is thinking you know that a market will do.
Remember the old trading adage: "Markets will do anything and everything to
frustrate the largest amount of traders."
7. Be humble.
When trading profits are taken, be glad that it was not a trading loss.
Don't grouse because you left a bunch of money "on the table" after you exited
your winning position.
8. On selling options, use caution.
There are some traders who do sell options on futures (as opposed to buying
options) and make profits doing it. And there are many traders that don't.
I heard a veteran speaker at a trading seminar once say: “I made over 40 trades
selling options in a year, with 97% winners - and still lost money.”
Remember the old saying that if it sounds too good to be true, it usually is.
9. Don't over-trade.
Trying to trade too many markets at one time is not good money management.
If you run into a losing streak, cut down on trading - DO NOT try to trade more
markets just too quickly recoup lost money.
10. To succeed at trading markets, one must first survive at trading markets.
Be conservative with your trading account and trading methods - especially if
you are a less experienced trader.
Go for those "base hit" trades, and don't swing for the fence and try to hit a
home run in a trading decision.
Traders need to survive to trade another day, if they can absorb a few losing
trades.
"Let me tell you
something you already know. The world ain't all sunshine and rainbows. It is a
very mean and nasty place and it will beat you to your knees and keep you there
permanently if you let it. You, me, or nobody is gonna hit as hard as life. But
it ain't how hard you hit; it's about how hard you can get hit, and keep moving
forward. How much you can take, and keep moving forward. That's how winning is
done. Now, if you know what you're worth, then go out and get what you're worth.
But you gotta be willing to take the hit, and not pointing fingers saying you
ain't where you are because of him, or her, or anybody. Cowards do that and that
ain't you. You're better than that!"
Rocky Balboa - Speaking to his son in Rocky Balboa (2006).
Trading is like boxing...
It is not so much about scoring the winning trades but surviving the losing ones
that will separate us as the winners from the losers.
Guessing what will happen is gambling.
Responding to what has happened is to play safe!
Since we can never be sure what the market will do next, our trading decisions
should be driven by what the market dictates and not on how we feel.
Never trade on hope. Only trade with the odds in your favor.
A Letter from God to Forex
Traders
