Money Management ( or how to make money using any strategy )

Money Management ( MM ) is one of the most important thing you should know about trading, yet is not always on the front page of the courses, books, etc.

There are lots of ways of using MM in your favor. The problem for many traders, beginners or not, is how to stick to it.

Everyone knows the basics, yet, not everyone understand it: "Never risk more than 2% from your account (SL), never invest more than 30% from your account (opened positions)". For beginners, I would recommend risk = 1% / trade and max investment/trades = 10-15%. This will not make you rich fast, but will give you the change to grow constantly. ( MM for real accounts trading is completely different from MM for the contests accounts, where you must use a much higher exposure and a much higher risk to be in the top 10 traders - but still, you must stick to it, from the beginning to the end of the contest ). To find some MM examples, check Lesson #8 from my Free Course.

Trading is about chances. By opening any position, buy or sell, on any financial instrument, you have 50% to be right ( price can go up or down/swings, even if the swings might have same highs and same lows - range market ). Because of this, you need a strategy, that will increase your chances to be right. Here is the catch: many people think of it and search for the "holly grail" of trading. The problem is they never quit searching...and they become "testers" of all the possible strategies around the web, for this. ( sometimes their lack of patience for testing it on demo, makes them testing it on real account, when their initial strategy failed them ).

Finding a good strategy might take you time, but it's either you have time ( for testing on demo ), either you have money to lose, to find it, this way. Sometimes, you don't have time for testing and you don't have lose either.
And after first loses, you start to "search" a new strategy that might make you rich. That's one of the most common mistakes, that will make you blow, one account after another...

After my first 2-3 years, while searching and testing all possible strategies, around the web, I found out that is useless to search for a "better strategy" ( any mistake you will mention it to me, remember, "I've been there and I've done that!" - that's why taking bad choices = experience for me, now ). The secret is related to the MM and R:R Ratio ( TP = 3x SL, for example ), besides Opened Positions Management and Personal Life MM. ( articles to come ).

Let's have an example of good MM and a very bad strategy with only 3/10 trades in profit ( yes, a very very bad strategy ), using a TP = 3 x SL :

- 7 negative trades ( 7 SLs hit)
- 3 profitable trades ( 3 TPs hit )

Lets say your MM Rules allow you a SL = 30p, that means your TP must be at least 3 x SL = 90p.

- 7 negative trades ( 7 SLs hit ) = 7 trades x 30p loss = 210p loss.
- 3 profitable trades ( 3 TPs hit ) = 3 trades x 90p profit = 270p profit.
TOTAL: 10 trades ( 3 positive and 7 negative ones ) = 270p - 210p = + 60p in profit.

Can you imagine now a medium strategy with at least 7/10 in profit ? Can you imagine what means using it with strict MM Rules and a R:R 1/5 or 1/8 ( using harmonics and Positions MM, your TP could reach up to 20 x SL my moving your initial SL and your initial TP ).

Lets see the math behind using the same MM Rules example  with SL = 30p and TP = 3 x SL = 90p:

- 3 negative trades ( 3 SLs hit ) = 3 trades x 30p loss = 90p loss.
- 7 profitable trades ( 7 TPs hit ) = 7 trades x 90p profit = 630p profit.
TOTAL: 10 trades ( 7 positive and 3 negative ones ) = 630p - 90p =  + 540 in profit.

Hope now is clear for everyone, that your MM Rules must be nailed on your wall, on your monitor and what's most important, in your head. And if you trust your strategy and keep the same data for your MM, while trading it, you should be in profit.

But, do you trust your strategy ? Did you made the statistic yourself ? Or you just use this strategy because someone claim is 7/10 profitable ?

Considering other people statistic is not enough. I also like to use 100 trades not just 10. So my statistic, could be: 80/100 trades in profit, for example. Why ? Because I need to see it on a long run and because math behind must show me if the "chances" are proven facts. ( do the math: how many consecutive loses can be possible , until 1 trade will make the profits )

We all know, trading is about emotions. To control emotions, we need rules. And we must stick to it, no matter what. That's why a 7/10 strategy, that will give you 5 consecutive loses, make you stop trading it and start to use another one. But what if the math was right, and you will see it as 70/100 trades ? That means you must be there for 30 loses...why to stop using it after just...5 negative results, consecutive or not ?

Ofcourse you should use MM Rules and:

n1. You must know, your SL and TP.
2. If your account reach -30% from initial balance, you should stop trading and go demo again!
3. Don't come back to real, until you'll find out, what went wrong !
4. Refill your account ( you need back up money always - Personal Life MM )
5. Keep the same rules and increase your trading lots ONLY if your account is double !

So, if your limit of loses is 30%, that must be the bottom line. You just need a system that allow you as many possible consecutive loses. If your MM Rules allow you ONLY 10 possible loses until this limit, not even the best strategy in the world, can't offer you profits !!! ( or if you have profits 1 month, means you are just... lucky )

Best Regards,



Blogger said...

Discover how 1,000's of people like YOU are making a LIVING online and are fulfilling their dreams right NOW.

Get daily ideas and guides for earnings THOUSAND OF DOLLARS per day ONLINE for FREE.


Post a Comment