You can’t ignore money management with your trading
Regardless of how good your trading strategy is, you’ll never get it right all the time. This means you face making losses from some of your trades.
This is why you must include money management as part of your trading strategy.
By looking after the risk side of things, you have a plan for your trades if things go wrong.
If you ignore money management, there’s a chance you’ll wipe out a large proportion of your trading account. Too many badly managed trades that hit their stop losses means you may not have the funds left to continue trading.
The good news is, there are two things you can do…
Two money management tips for trading
Money management tip #1:
Only risk a small percentage of your trading account on any trade you put on. Sticking to around 2% of your trading account is a good idea.
For example, if you have R10,000 in your trading account, by sticking to the 2% rule, you should never lose more than R200 if your trade hits its stop loss.
Money management tip #2:
Stick to a risk/reward ratio of 1:2 at the minimum. To put it another way, your risk (determined by your stop loss) should be half of your potential reward (determined by your profit target).
By using these tips, you can cope with a series of losses and still have funds to keep trading. If you risk a large percentage of your trading account, say 50%, you can only cope with two losing trades before you decimate your funds.
And by following a risk/reward ratio of 2:1, you only need to be correct with your trades 40% of the time and you’ll still be profitable.
So there you have it. The most crucial aspect of trading that will get you through whatever the market throws at you.
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