Money Management 101

The Managing of MoneyWhatever you trade and however you trade it, money management is going to be one of the most important concepts in determining your success. There are some very technical concepts that you can devote a lifetime to learning when it comes to money management, but you don’t need to get this specific most of the time. Many of the most powerful concepts come down to common sense. Never risk too much on a single trade, for example. Never trade with money that you will need in the near future, either. These are both things you already know, but applying them instantly to your trading will have a profound impact on your success.

Perhaps the most important thing that you can use to power your trading is to learn how to evaluate the likelihood of success that a specific opportunity has for you. You can apply this to any market. Look at options, for example. If you have an 80 percent return and a 75 percent chance of success, you would risk more than if you had a 75 percent return and a 65 percent chance of success. Just how much more depends on the amount of cash you have available to trade with. Next, look at the Forex market. If you are trading the USD/JPY, and you see an opportunity for a 10 pip trade that you think has an 80 percent chance of coming through in the next six hours, you would want to use more leverage here than if you saw an 8 pip trade that might take three days to materialize. And in the stock market, if you were trading Alphabet and saw that they were going to rise $5 over the course of the next two days, you would put more money into the trade than if you thought that the stock might go up $2 in the same timeframe.

There are three main takeaways from the above examples, all of which need to work their way into your money management.

Time is a factor in your trades. The faster a trade will materialize, the better because that means your money is working harder for you. You can also put that money back to use more quickly.

Next, the expected return is important. You want to take on more risk when your return is better.

Finally, your certainty of success determines the rest of your actions. You want as high of a degree of success as possible. The more likely you are to succeed, the more heavily you should pursue the opportunity that you see. Risk adverse people will like this last one because it closes out the iffy trades and points them to the best ones. These three concepts need to all be tied together.

Regardless of how you end up approaching your money management, remember that this is not a system. In the world of trading, those get rich quick systems just don’t work. 99 times out of 100, they are big scams. And that other 1 time, the person behind the system just doesn’t know what he’s talking about. Money management is not a system, but rather a mode of thinking that allows you to preserve your existing capital while finding smart and safe ways to grow it. As you get ready to graduate from Ms. Winston’s class and take your trading to the next level, remember that although it can be really exciting to have the prospect of multiplying your cash and being rich tomorrow, those systems are just out for your money and do not have your best interests in mind. A good method of trading won’t get you rich quick, but will help you to see steady returns over the course of time.