You Need Trading Money Management

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Now, these rules and guidelines for trading money management are determined before you even enter the stock, that way you don’t get emotionally involved with the stock and make poor trading decisions. You want to make sure with good trading money management, that you can maximize your profit on a winning trade and minimize your losses on a losing trade. With superior trading money management, you’re able to adhere to the two cardinal rules of trading, and they are to let your profit runs and cut your losses short.

That leads to why trading money management is so important. You see, if you don’t have these rules in place, these rules predefined, what will end up happening and this is what happens to most traders and why most traders fail when they come to the market, they being to rely on their emotions to make their trading decisions.

With good trading money management, you don’t need to worry about your emotions. In fact, your system is set on autopilot. So, you don’t need to think on the fly and decide. Should I hold on to this stock? Or shouldn’t I hold on to this stock?

It’s that type of indecision that most people are confronted with if they don’t have good trading money management in place, and the result is they end up holding on to losing stocks. Stocks that are losing the money.

And, just keep in mind that all big losses once began as small losses. Moreover, if you let a losing trade turn into a big loss, that’s going to have a detrimental affect on your trading capital, and once you take a couple of big losses, it’s much more difficult to trade and to gain back the money which you’ve lost.

More importantly, if you’ve wiped your trading float out, like many traders do when they first get started, you cannot continue to trade.

Despite the proven fact that trading money management is so important, it’s funny, many of my clients when they initially come to me, they focus the majority of their time looking for the Holy Grail by focusing on entry. It’s like they want to find the perfect indicator.

That indicator is going to be the silver bullet for them that slides the market. Not only is it going to get them right at the bottom of the trend, but it’s going to get them right out at the exact top of the trend. That way, they’ll make the most money, and best of all, this indicator apparently is guarantee.

Unfortunately, even though I don’t like to disappoint my clients, I have to let them know two things. Firstly, there is no Holy Grail. There is no perfect indicator for acceptable trading money management.

Secondly, I have to let them know even if you were to find that perfect indicator for trading money management that would get you in at the bottom and get you out at the very top, even if you did find that, it’s not when you buy the stock or when you sell the stock that determines how much money you’re going to make. It’s how much you actually put into the trade

Let’s take an example, let’s say that I had a system and my system gave me a buy for a particular stock, let’s call it XYZ, and it gave me a buy at one dollar. I progress through the trade and I exited at two dollars. Now, if I bought at a dollar, and then sold it two dollars, I made one dollar, or 100 percent profit.

What determines how much money I actually make on this particular trade? Sure, I’ve made one dollar per share, however, it depends on how much money I actually put into the stock that’s going to determine how much I actually make, and that goes for losing stocks as well.

If I had a losing stock, it’s not when I actually sold that determines how much I lose. What determines how much I lose is how much I put into that stock, and that’s why trading money management is so important. There’s a great book that really illustrates the importance of trading money management. It’s actually called .Trade Your Way to Financial Freedom,. and if you haven’t read it, I recommend you do. The author’s called, Dr Van Tharp, and he’s a psychologist who conducted research on the most successful traders. He wanted to find out what made them so successful.

Through his extensive research, he broke down the keys to success into three major components. He called them system, trading money management, and psychology. He said the system makes up only ten percent of the successful trader, ten percent, and by system, he’s referring to the entry and exit conditions. He’s referring to what most people spend most of their time on, and he said that’s the least important component of trading.

Next, he said trading money management makes up 30 percent of a successful trader. Trading money management is simply the definition I touched on before, which is rules and guidelines that set out your risk in the market.

The final component is psychology, and he said that makes up the remaining 60 percent of a successful trader. Now, psychology may sound a little bit airy fairy, however the reason he said that psychology’s the major component, which will determine whether or not you’re successful in the market, is because if you had both perfect system and money management in place, you would only be successful if you could follow that system. You see, I could give you a perfect system, and I can give you perfect trading money management, but really it comes down to your discipline to be able to follow that system, and this is going to determine whether or not you make money in the market.

You see, most people fall down when they come to trading money management because they do not approach the market in a systematic fashion, and that’s where a trading money management plan comes into place, and that’s why you need to stick to trading plan. I know I’ve ranted on a little bit about how important money management is, but it’s vital that you spend the majority of your time constructing good trading money management rules to follow.

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