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Money Management – Find It Right Or Be Amongst Video Game!

Money Management – Get It Right Or Be Out Of The Game!Article by Martin Hayne








Hopefully you will have read about my own experience of ignoring my own Money Management rules. It was a very hard lesson, and hopefully you will heed my advice and ensure that you religiously stick to your own Money Management rules…. It really can be the difference between growing your capital, and losing it altogether!In case you have yet to define your own Money Management rules, I thought I would write some things for you to think about. I hope you are able to take something from these to improve your Money Management and Trading.To my mind, and from my reading, you need 4 key things for your money management rules, these being:-1. A Defined Stop Loss Before you enter the trade, it is crucial for you to know where you are going to place your stop loss. This is the price where, if the market goes against you, you no longer want to be in the trade.Typically, there are two main types of stop used by retail traders.a) Equity StopThis is the simplest of all stops to calculate. Basically, either through the rules of your Trading Strategy, or indeed your trading style, you have a predetermined number of pips you want to place the stop at. There are some that do not like this type of stop in that it bears no relationship to the price action of the Market. That said, if it is Trading Strategy related, and that strategy is netting you good pips each month, then the success rate of the Strategy itself is justification enough to use it.b) Chart StopThis stop is based on technical analysis, so essentially driven by price action. As a Trader you will have various important levels and trend lines on your chart. These may be Pivot Points, Fibonnacci Levels, or defined Trend lines with 3 or 4 ‘touch points’, but whatever they are, you are essentially making a projection that, should your trade go against you, there is a good probability that the technical level you identified will hold the market and reverse it back in your favour. The downside in this type of stop of course, is that your technical analysis will probably identify lots of potential stop levels! You must however be disciplined, and identify just the one most probable, and stick to it! Now, you don’t want to be putting your stop loss directly on that point, so you could place it maybe 5 or so pips past the actual level (some call that ‘wiggle’ room!).2. A Per Trade Risk On Your Capital This is the amount of money you will risk on any one trade, defined as a percentage of your capital. There are various guidelines to this, and most would be dependant on your experience and success as a trader, but they range from 1% to 5%. Personally, when starting out, I risked no more than 2% of my capital, but mostly use 3% these days.3. A Maximum Daily LossYou need to set yourself a maximum amount of your Capital, defined in percentage terms, you are willing to risk in any one day. I personally found this very, very useful, but also very, very hard to adhere to. Again, various opinions are written on this subject, but 6% to 8% is typical, so you are essentially limiting yourself to 2 or 3 consecutive losses if you had no winning trades that day.4. A Discipline to Take Profits!For me, this is as important as managing the losses on your Capital. Always define a Take Profit target before you enter a trade. Like Stop Losses, Retail traders generally use two types of Profit take targets, and they are exactly the same as

Money Management – Find It Right Or Be Amongst Video Game!

Thu, January 19 2012 » Uncommon