Money Management is the Key |
Like Icarus of Greek mythology, who flew too close to the sun and plummeted to his death when the heat melted the wax holding his wings together, in 2001 we watched the stock market drop like a rock as the Internet bubble burst. Millions of traders and investors lost money, but many didn't. Those who didn't lose it all were either lucky, or good.
If you're going to be successful in trading you need to be good, not lucky. A string of luck is always welcome, but the moment you require luck to succeed you'll fail. They key to consistently making money by trading is knowing how to lose money.
Does that sound counter-intuitive? It shouldn't. If you expect to trade and not lose money, let me be the first to tell you that it simply won't happen. In fact, many of the most successful traders lose money a lot more often than the unsuccessful traders. Here are the two reasons they can do that and still succeed:
1. Successful traders never lose a lot of money on a single trade. There are exactly 5 possible outcomes to a trade:
a. Lose a lot of money
b. Lose a little money
c. Neither make nor lose money
d. Make a little money
e. Make a lot of money
If you can eliminate the first outcome from ever happening, you've just gone a long way towards making money.
2. Successful traders never put too many eggs in one basket. If you've got a trade so large that even a small percentage loss will make a large percentage dent in you account, you're not trading smart. Part of the rule-system that governs the actions of successful traders involves setting and sticking to a maximum value that can be risked in a single trade.
If you have a $1,000 account, and you never want to risk more than 5% of your account on a single trade, does that mean you can only buy into a $50 position? Of course not, it would be impossible to make money that way. The maximum amount you're willing to lose on a trade is $50. If you can set up a $500 trade in a way that your maximum loss is $50, you've satisfied the rule. Fortunately, it's very easy to set up a "stop-loss" on a trade, which is a pre-set point at which you instruct your broker to get you out of your trade. This allows you to know your maximum loss before making the trade.*
* A stop-loss is not an absolute thing. They work as advertised most of the time, but various market conditions will occasionally cause your broker to miss your stop-loss price. A smart trader will place their stop-loss prices so this sort of thing doesn't cause disaster
Money Management is the single most overlooked aspect of trading. It's far more important to manage your account's value properly than it is to find the exact bottom or top of the market. Money management can make the difference between a winning trader and a ruined trader, even if they both buy and sell the same things at the same time. If you've considering trading, or if you already trade but aren't as successful as you'd like to be, you owe it to yourself to learn more about this important topic.About the Author:
Jeff wants to share financial independence with everyone. Visit http://www.SimpleForexTrading.com to pick up a free e-Book with more details about Forex trading. Courses that teach you everything you need to know about this exciting money-making strategy are also available. Trade Smart, Trade Profitably, Trade Simply at http://www.SimpleForexTrading.com "...you're going to be successful in trading you need to be good, not lucky. A string of luck is always welcome, but the moment you require luck to succeed you'll fail...." |
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