Trading Money Management Essentials: Minimum Risk, Maximum Profit

The very first thing you have to do for wonderful trading money management, is to outline your trading float. The very next thing to do is to decide upon your maximum loss. This is the maximum quantity of capital you're pleased to lose in any one trade. We want to do this before we even open a trade in order to obey one of the important rules of trading which is keep your losses small. Most traders fail because they risk too much. Just as a cricketer desires to remain in so that he will keep on making runs, so above everything else, you want to protect your float so that you can keep on trading.

It may seem pointlessly defeatist to scrupulously consider the chance of losing before you begin trading, but it is really important to take a defensive position. Accept the incontrovertible fact that losing is part, but not all, of trading, and do not get upset about your losing trades. A clear head is necessary. Becoming emotionally attached to your trades should not play any role in the scenario.

What's the maximum loss you need to accept which is one good money management strategy? When you buy Metastock, you must consider that when you begin using such tools. There is a well known rule among traders called the '2% rule.' This indicates that you shouldn't risk more than 2% on any one trade. Many traders think that even this is much too high. For most they only ever risk 0.25% to one percent.

Let’s consider an example. If I had a trading float of $40,000, applying the 2% rule, a maximum loss would be $800 on any one trade. Only the extremely unlikely event of suffering fifty losses in a row would wipe out my entire float. In actual fact, more losses than that would be needed to wipe out the entire float, because, when implemented correctly, the 2% is calculated on the current float size, not the initial float size.

Let me explain. As stated in the above example, 2% of $40,000 is $800. If I experienced a loss to start off, my float would be reduced to $39,200. I would then use the figure of 2% of $39,200 as the maximum loss for my next position. Two percent of $39,200 is $196. So with every fall in equity, the maximum loss falls too.

Being such a small percentage of the trading float makes it far easier to recover the amount that has been lost.

Good trading money management is tough to maintain with a very small float. Using something like a Metastock Pro can be useful. About $10,000 as a minimum is what is needed to begin trading. If you have got a smaller float than this, you could need to accept a greater risk.

Setting a maximum loss is what you need to endure a chain of losses. Most folks get scared when they endure many losses and need to get out. But the aim of the game is to remain in the market, so that when things turn around you are there to take advantage. When the market turns around you'll be cashed up and in a position to take advantage of this favorable situation.