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Trading basics: A money management technique to ensure your trading account survives and thrives

by , 23 January 2015

Starting to trade with your own money after using a demo account is a nerve racking experience. What if you get it wrong and you lose money?

Losses are part of trading. You can't expect to get it right every time. That's why it's vital that you manage your trading account in such a way that you can take a few losing trades and still have enough money to continue trading.

So what's the best way to do this?

Read on to find out…

The importance of money management

When it comes to trading basics, before you even think about putting your first trade on, you need to have a money management strategy in place that means you’re not putting too much money on the outcome of one trade.

The best way to ensure that you manage the money in your trading account well is to only place a small percentage of your trading pot into each trade. The smaller this percentage, the more trades you can put on if you hit a run of losses.

Only risk 2% per trade

When you trade, 2% of your trading account is a good rule to follow. This helps to lessen the risks to losing your entire trading pot.

So if you have R10,000 in your trading account, you’ll only risk R200 on each trade. This might sound like a very small amount. You may be thinking this isn’t enough to make big profits.

But it’s vital that you start off small. If you get a run of winning trades, the amount in your trading portfolio will grow. This, in turn, will increase the amount of money you’re willing to risk on each trade.

By risking only 2% of your trading pot on each trade, you can endure a run of losing trades without decimating your account in the process. Even the best of traders go through bad runs.

This rule will keep your losses to a minimum. And over time, your trading pot should grow.

So there you have it. A money management technique to ensure your trading account survives and thrives.

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Trading basics: A money management technique to ensure your trading account survives and thrives
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