Manage Your Money For Trading Profits
February 13th, 2008 by admin
How do you put money management working for you in as simple a manner as possible?
Reading through all the money management books can be very dry, which is why I have simplified the entire trading concept and philosophy into a super simple, short and easy to understand format for you.
To illustrate a key concept of money management and expectancy in trading, I’m using a very, very simplified explanation of a very important trading concept.
Understanding this key concept in trading will help you to stop searching for the elusive, non-existent Holy Grail of 100% wins, and actually focus on what’s relevant and important in trading.
So pay attention!
The Truth of the Holy Grail
In as simple terms as possible, you’re looking for a system that puts you in profit after a series of both WINNING and LOSING trades. There are 2 key points to note for you to have a better grasp of this concept.
- Number of winners/losers
- Amount won/lost per trade
For example, you have a trading system that wins 3 out of every 10 trades. That sounds quite horrible, doesn’t it? Your trading system only wins 30% (3/10) of the time.
When you see this, you might be tempted to just throw the system out into the trash, and start working on your wonderful idea of how you can win 99% of the time, and not give this particular system another glance.
Basic Money Management Concept
This is where basic mathematics comes in together with simple Money Management.
What if this trading system wins $5 on each winning trade, and loses $1 on each losing trade? Let’s take a look at the numbers:
3 winners x $5 = +$15 net profit
7 losers x -$1 = -$7 net loss
Total Net Profit/Loss = +$8
Hey, you’re actually making money! You may not like going through the losing trades, but the end result is that you’re still making money. And as a beginning trader, it’s not whether you like your system, it’s whether your system makes money for you.
You have to focus on what works, and what doesn’t, and forget about liking or hating a system. While it would be easier to trade using a system that you like, the more important part of becoming a trader is learning the relevant facts first.
After you understand what works in the market to make money and what doesn’t, you start becoming a better trader by trading what works and throwing what doesn’t out the window.
Ryan Lee Daniels
Smart Trading For Profits
The Forex Trading Education Blog Site
Tags: bonds, currencies, currency, forex, futures, Manage, money, options, profits, stocks, trading
Related Posts
Posted in Finance |