Importance of Money Management

Importance of Money Management

Join up two beginner traders and give them the best set-up with a high probability then have each of the trader at opposite sides. It will be most likely that both of the traders will lose money.

However, if one puts two professional traders and then they will trade in opposing directions it is almost a certainty that each of them will make money inspite of the contradicting directions. What is the factor that separates the professional from the rookie traders? The factor is their way of managing the money.

Just like any activity in life, managing money is an activity that most of the traders speak about but very few of them really practice them. The reason for this is also quite simple. Managing money can also be troublesome.

It can be an unpleasant undertaking for others. It will force any trader to continuously monitor the positions they hold and take on losses that are deemed necessary and there are very few traders who actually like doing that.

The Big Win Books about trading tells about stories of how traders lose at least one, two, three or five years amount of profits with just one trade that goes horribly wrong. Usually most of these losses come as an outcome of a bad money management.

The reason for this could be difficult stops and multiple downs at an average with the longs and many ups with the shorts. Ultimately the reason for most losses is primarily due to lack of discipline.

Many traders start their careers imagining the "ultimate big one". This means that there is one transaction that can earn millions of profits which would allow the trader to retire at a young age and live a carefree life in leisure and pleasure.

This imagination is further emphasized by many tales of the traders in the market. One of these tales is about George Soros who broke into the England bank. He did this by shorting some pounds and he finally walked away with a whopping one billion dollars worth of profits in just one day.

The truth is most retail traders experience the big loss instead of the big win that can remove them from the trading business in a quick time.

Learning Tough Lessons Most traders avoid losing by having a control on the risks they take through the stop loss orders. A noted trader, Jack Schwager's advises that traders to never risk an amount which is higher than one percent of the trader's equities.

This should be applied for any trade.The logic is risking just one percent makes the trader indifferent to the other trades. This means he can make twenty trading mistakes but still keep eighty percent of the equities he has.

Money Management Styles In General there are at least two practical ways in attaining success in money management. A trader can choose to make several and frequent stops and then make the effort of harvesting profits from the few trades that gained huge wins.

The next choice is that a trader can opt for several small gains and then take on huge stops but not frequent in hoping that the profits can overcome the few huge losses. The style you choose always depends on one's personality. It can be considered as a self discovery. The best thing is that the Foreign exchange market has room for the two styles with equal pros and cons.