October 21, 2012
Perhaps the most crucial aspect in sustaining one’s ability to trade over the long-run is a sound money management plan. A money management plan defines one’s risks parameters as it pertains to how much capital will be allotted to any particular trade.
Before I progress too far into this post, let me assert that you should never trade with money that you cannot afford to lose. I would greatly recommend that you never place real money on the markets if you don’t have a strategy or system in place that has shown the ability to be consistently profitable on a live demo account over a period of at least two months covering at least 200 trades. (A free demo account can be found at Markets World (marketsworld.com). 24Option (24option.com) and Banc de Binary (bbinary.com) also offer demo accounts that do not expire, but require a deposit to set up.)
Beginning traders generally have the issue of risking far too much and, as a result, wipe their accounts clean relatively quickly. Nearly all traders who have put real money on the markets, regardless of skill or experience level, have felt the distress of wiping an account at one time or another.
But with a solid money management plan it doesn’t have to happen. Especially for beginning traders, I am a big proponent of trading small, fixed amounts, preferably investing no more than 1% of the capital available on any given trade. Ideally, when first beginning to trade live, trading the minimum trade size offered by your broker of choice is the way to go. At Markets World, you can make live trades for as little as $1/£1/€1. The purpose behind trading such a small amount is that you’re least likely to allow emotions to play a pivotal role in your trading and feel far less likely to double-up, triple-up, or worse when the trades aren’t going your way. In fact, I have read of some professional traders who never invest more than 0.1% of their available funds on any one trade.
The basic premise behind money management is that your trade size should be so small that it should almost feel like a waste. Indeed, you probably won’t make much money initially trading 1% or less of your trading account, but that’s definitely not the point. Trade to trade well, not to simply make money. Poor money management (and the emotions that come with it) can put you out of the game permanently. The world’s best traders don’t think of how they can make on their next trade or idealize a certain monetary target that they hope to reach by the end of a certain period of time, but how much they can lose and plan accordingly. Once you can master actually be able to trade well consistently, everything else will take care of itself.
Click here to read my second post on money management.