Thursday, June 29, 2017

Money Management… The Secret To Successful Trading

money management forexThe trading public, the new aspiring currency trading person, and the curious observer of the forex all seem to think that the secret to creating wealth in the markets is to have some sort of magic indicator or system that few people know about. It’s this kind of thinking that keeps the trading system gurus in business and new traders from becoming old traders.

Unfortunately, very few traders learn, until it’s too late, that the principles and formulas behind money management is where their initial focus should have been from the beginning. The creation of wealth and the preservation of trading capital begins when a trader understands how to properly manage his or her money. Until this becomes an integrated part of your trading plan, you remain destined to be just another wide-eyed amateur, skipping from one trade to another with no idea at all how these wins and losses will ultimately affect the size of your account.

Money management is one of the least sought after topics by most currency traders. Courses and books usually will have the money management discussions tucked away in the last few chapters. Try listening in on anyone talking forex trading and it’s always about a new indicator, the strategy du jour, or some new fangled piece of software. At first glance, the idea of money management doesn’t seem very sexy. In fact it’s down right boring to most traders, which is why most traders lose money.

Most Forex Traders Are Too Random With Their Approach

Money is made by successful traders when they learn that each segment of their trading plan requires an advantage. We select a particular set-up or strategy because it gives us an edge. We establish a stop-loss or length of time designated to remain in a trade because it provides us with an edge. We use a certain broker because his trade executions or fees, once again, give us an edge in our trading. Money management does the same thing as we decide how best to direct our funds for each trade.

A smart trader understands the need to analyze, optimize, and implement every statistical advantage he or she can within the blueprint of their trading plan. The proper marshaling of funds, once understood,  is even more important than coming up with the hottest, super, “Can’t Lose Double Thrust Buy On A Down Close” trading system.

Could You Make Money From A Coin Flip

Many of you won’t believe me, and I can almost see you snickering, but consider this… what if I could show you a money management system that allowed you to be profitable with a method that selected currency pairs with a coin-flip? How powerful would this information be if you could insure a profit using what seems to be such a random method for determining a directional bias?

Wow… this is good stuff. Suddenly, when you begin to consider the possibilities of what a well thought out money management formula can do for your trading, it starts to get kinda sexy doesn’t it? Gamblers and casinos have been using these types of algorithm’s for years. And although the “coin-flip” analogy is a bit simplistic, these formulas do indeed exist. However, a detailed explanation on gambling algorithms would be extensive and are beyond the scope of this  article.

Finding A Formula That Works For You

There are many different approaches, techniques and formulas to money management. Some key considerations would be the size of your account, your personal risk tolerance, and the system you are trading. Using back-tested data from your system (be careful not to use curve fitted, overly optimized results), you can select a money management formula that will factor in  expected profits, drawdowns, maximum loss per trade, etc.

This data forms a set of inputs for the formula known as “expectations”. From this we can put together a sensible allocation of our funds for each trade, while automatically increasing our trade size as profits grow. This creates a logical method for increased position sizing while still managing exposure and risk. By using a proper money management system, we can now begin to create real wealth within our account instead of focusing on winning or losing trades individually.

As a new student of the markets, I hope this information has opened your eyes to the importance of money management. Finding the right method for you will take some research, but by doing so, you will be on the road to trading like a professional.

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