When it comes to trading, and it does not matter what market you are in, there will only be so much that you can find out about the movement of the market. And you absolutely have no control with it. It may go up or go down or a trend may last really long or just seem like a microsecond. What remains true is you are just making your estimates and guesses. If there is any full control that you may have in your market, it would be with your trading money management.
Whether you are into day trading, foreign exchange trading, or stock trading, you definitely need a form of money management strategy to guide you with your trading activities. After all you cannot just go head on with each trade that you do or else you would end up with completely nothing should you lose big on any trade. It should also contribute in helping you make the right decision whether it is time for you to enter or exit a market.
Do you want to experience success in your trading? Then you have to understand and implement your own trading risk management strategy, which is basically what trading money management is also about. But what is it exactly?
Risk management is the set of rules that you follow at a level of which you are most comfortable. There are four components to this:
1. Trading float
This refers to the amount of money that you set aside when you are trading. Because when you trade a lot in any market, you are increasing your risk to either win or lose.
2. Maximum loss
When you trade, unless you are a daredevil, you always set aside some of your money and you do not risk all of it in just one trade. Maximum loss is therefore the maximum capital you are ready to lose in a single trade.
3. Initial stops
Sometimes you will have to raise the white flag and admit defeat. There is no shame in that. No trader will ever be success all of the time. What you can do, and probably the best, is to stop your trading and make an exit. This way you do not risk losing everything you have with just one trade.
4. Trade size
When you have set your initial stop, you need to calculate your position size so you will never have to lose more than your predefined maximum loss. The simple formula for this is:
maximum loss / initial stop size = number of units to purchase
You should always use this formula and you will not need to worry about making big losses next time that you trade.
These are the four components of your risk management or money management strategy that you should diligently follow. It will help you prevent from getting big trading losses and instead, help you become a true success with all of your trading activities. Because without proper control with the way you are handling your finances, or in this case, your trading money, you would not last long to get another chance at the market.
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