Complete Money Management Guide for Trading Success

Take two novice traders, seat them in front of a screen, give each of them the opportunity to work using the very best trading system, and for an even score, tell each of them to trade by opening positions opposite to each other. It is more than likely that in the end both will lose their money. However, if you take two professionals and instruct them to trade in opposite directions relative to each other, both traders will ultimately make money, despite the apparent contradiction in the directions of their trading activity. What is the difference? What is the most important factor that separates experienced traders from amateurs? The answer lies in the ability to manage capital. In money management.

As with following a diet or doing sports training, capital management is something that for most traders exists only in words, but in real life receives almost no attention. The reason is simple: just like healthy eating and staying in good physical shape, money management can seem burdensome and quite unpleasant. It forces traders to monitor their positions constantly and accept necessary losses, and few people like doing that. Nevertheless, as shown in the table below, accepting losses is crucial for achieving success in trading over the long term.

This table shows how difficult it is to recover after heavy losses.

Despite the fact that most traders understand numbers perfectly well, they constantly ignore them. Books devoted to trading contain countless stories of traders who lost, because of one fundamentally wrong trade, the profits accumulated over one, two, and even five years. As a rule, rapidly growing losses are the result of careless money management, without hard stops and with position averaging as price moves against the trader. Above all, rapidly growing losses are explained by a simple loss of discipline.

Traders can avoid this fate by controlling their risks through the placement of stop-losses. In Jack Schwager’s famous book Market Wizards (1989), intraday trend-following trader Larry Hite offers this practical advice: “Never risk more than 1% of your capital, regardless of the instrument or trading style. By risking only 1% of my capital, I remain completely calm about any trade I make.” This is a very good approach. A trader can be wrong 20 times in a row and still have 80% of their capital left.

Generally speaking, there are two successful capital management strategies used in practice. A trader can set frequent and small stops and try to take profit from several large winning trades, or they can take frequent but small profits from the market and set infrequent but large stops in the hope that many small gains will outweigh several large losses. The first strategy can produce many minor instances of psychological pain associated with losses, while at the same time bringing several major moments of satisfaction associated with large profits. On the other hand, the second strategy brings many small moments of joy connected with taking frequent small profits, and at the same time several psychological blows connected with taking rare but large losses. Because of the infrequent placement of stops, situations quite often occur in which, in one or two trades, a trader loses the profit accumulated over a week or even a month.

As soon as you are ready to trade with a serious approach to capital management, to money management, and have a certain amount of funds in your account, you can use the following four types of stops.

1. A stop based on account balance.

This is the simplest of all stops. A trader risks only a predetermined amount of their account when making a single trade. The general calculation is that the risk should not exceed 2% of the amount of money in the account under any trading strategy. If, for example, there are 10 000 USD in a trading account, then the trader can risk only 200 USD, or approximately 200 points when using one mini-lot (0.1 lot) of the EURUSD currency pair, or only 20 points when using one standard lot (1.0). Aggressive traders may consider using a stop equal to 5% of the amount of money in the account, but it should be borne in mind that this amount is generally regarded as the upper limit of sound capital management, because 10 consecutive wrongly executed trades can reduce the size of your deposit by 50%.

2. A stop based on chart analysis.

Technical analysis allows you to set thousands of possible stops depending on the price chart or on various signals provided by technical indicators. Traders focused on technical signals can quite successfully combine these exit points with standard stop-placement rules based on account balance (see above) and obtain stops based on chart analysis.

3. A stop based on volatility.

This is a more complex strategy compared with placing stops based on chart analysis. In this case, to set stop parameters, a trader uses price volatility instead of the price chart. The idea is that in conditions of high volatility, when prices swing in wide ranges, the trader needs to adapt to current conditions and, when opening a position, should increase risk so that intramarket noise does not hit their stops. For low volatility, the opposite applies: risk parameters should be reduced.

One simple way to measure volatility is to use Bollinger Bands, which display standard deviation to assess possible differences in price movement. Also, many traders use the ATR indicator to calculate stop-losses. Note that the total amount of risk when opening a position should not exceed 2% of the deposit, so it is very important that a trader enter the market with smaller lot sizes in order to calculate their cumulative trading risk correctly.

4. A stop by margin call.

This is perhaps the most unconventional of all capital management strategies. Unlike exchange markets, the Forex market operates 24 hours a day. Thus, Forex market dealers can liquidate their clients’ positions almost immediately as soon as they receive a margin call. For this reason, those trading in the Forex market rarely face the danger of getting a negative account balance, because broker computers automatically close all open positions. This strategy can be applied only if you are prepared for the COMPLETE loss of your entire deposit in any trade. Which is not very productive.

Kak vy vidite, upravlenie kapitalom (mani menedzhment) na rynke foreks yavlyaetsya takim zhe gibkim i raznoobraznym, kak i sam rynok. Edinstvennym universalnym pravilom yavlyaetsya to, chto vasha glavnaya zadacha - eto ostavatsya v igre. A eto nedostizhimo bez gramotnogo podkhoda k vyboru razmera pozitsii.

Tema na forume

S uvazheniem, Vlasov Pavel Tlap.io