3 key money management rules for trading
Trading is riskier than ‘standard' buying and selling of shares. If you're not careful, one bad trade could easily wipe out your entire starting capital (and more) and end your trading career before it starts. Read on to find out three key money management rules for trading…
Good money management is about avoiding exposing yourself to this scale of risk in the first place, explains John Burford in MoneyWeek
This involves the prudent use of stop loss
orders to manage risk of loss.
The good news is that effective money management isn’t complicated. The skill lies in sticking to it... and NOT getting carried away by a run of good luck, or panicked by a string of losses.
How to ensure you don’t wipe out your trading account
The following three key money management rules will keep your trading on the straight and narrow…
Rule #1: The golden rule
Preserve your account equity – the money you started your account with.
How do you do that? By always following these other two rules...
Rule #2: The 3% rule
Never risk more than 3% of your capital on any one trade.
That means you must ALWAYS have a stop loss in place in order to avoid losing any more than 3% of your capital.
Here’s how to use your stop loss to maximum effect...
3) The break-even rule
Move your protective stop to break-even as quickly as possible.
Unfortunately, this has to be a judgment call, as there is no hard-and-fast formula.
The fact is, no trader gets it right 100% of the time, or anywhere close. Losses are to be expected.
What really separates those who make money in the long run, from the rest of the herd, is that they are able to avoid ruinous losses... and so live to trade another day!
There you have it, three key money management rules for trading.