|
Today
we'll talk about the crucial elements
of money management.
Even
if your trading system only produces a 30%
win rate – when you look at a group of 100 trades 30 of them earned you money and 70 lost – if you use sound money management you can stay quite profitable and continue to grow your trading float.
For
now, let’s just consider what a sound money
management system includes, and the factors you need to understand to.
Your
Money Management System Includes:
+
%R – Percentage Risk – The Maximum amount you
are willing to risk on any one trade.
+
Stop Losses – A clearly defined stop level
that fits with your %R to ensure you never lose more than your maximum risk level on a trade.
+
Trailing Stops or Take Profits – A system
that defines when (and how) you will exit a profitable trade. Some traders use take-profit levels, in this book we will take briefly about TP, but we have devoted an entire chapter to trailing stops.
+
Trade Size – Using your %R, and your stop
loss, your money management system defines how much you will trade when you enter any given trade.
Stated
like that, in four simple steps, money
management sounds simple enough. However there’s more to it.
You
will need a clear understanding of what your
trading float is and how it affects trade size. You will require a clear understanding of leverage and how it affects risk. You will also need to understand how trading systems (especially those that include ideas like averaging down) can erase your trading account in a very short period of time. Finally you need to understand the importance of back testing, with your money management system, to ensure you can make money before you ever put your own money on the line.
By
the time we are finished here you will have
that knowledge and more. In the next lesson we will start by simply talking about trading floats, and how leverage works. If you’re an experienced trader this may seem like basic information, but it is important to have a clear understanding before you create your money management system.
Until
then, good trading,
Mike Renner - Currency Trading Elite
=============================================
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