“All traders make mistakes, however big traders limit the damage.”
– Anonymous
A key issue in the design of a Trading Plan in the survival of a trader in the financial markets and the possibility of achieving recurring benefits is money management ( Money Management ). It is not uncommon to find that many of those operating in markets often confuse these techniques with mere placement of the ” stops ” of losses in operations and ignore the potential benefits and risk control they provide.
Proper management policy Money must have a global approach to the use of capitalallocated to trading, covering aspects such as monitoring the balance of operations, the size of the positions, the use of leverage ( leverage ), the performance periods losses enjoy the rewards … with the dual aim of avoiding ruin the account and grow consistently.
To do this before you start trading should be designed and possibly written policy Money Management that fits our operational. To facilitate this vital task can be helpful to consider the following:
- Regularly monitor profits and losses from trading . The frequency should be adjusted to the timeframe of our operations, but in any case a monthly and annual balance is essential, in addition to weekly or even daily balances if operated intraday.
- Capital protection on the benefits and possible additional contributions to this end consider:
- Periodically remove the benefits and not let grow the account if not voluntarily want to increase the capital for trading.
- Avoid money to replenish insufficient margin notice , in this case what should be done is comprehensively review our method of trading and what has happened.
- Position size , which depends on the available capital but will adjust our method of operating, for it to consider:
- Prudent concerning the available capital .
- Resizable adapted to market conditions (eg volatility) and / or situations of trading or a fixed size of the position to more easily assess progress and its consistency.
- A scalable size that allows sufficient flexibility to develop different operational strategies (add / reduce batch) keeping the risk limits set.
- Using Leverage is one of the most important aspects and sometimes difficult to understand, but a key to achieve profitability factor consistently. This tool used prudently and appropriately gives our operational a great potential, but its misuse is often the main reason to ruin an account, consider this:
- The maximum number of contracts , which is normally set based on the capital available (eg mini SP 1 contract for $ 10,000 for moderate risk profile).
- The maximum number of contracts should also consider the possibility of a period of consecutive losses ( drawdown ) that does not exceed 5% of available capital.
- Increases volatility (price range in which assets move) from which the position is lowered.
- The position increment based on the capital and the positive outcome of the previous operations and is desirable to have limited the maximum risk assumed in each operation does not exceed 2.5% of the capital.
- Management periods of losses ( Drawdown ) with rules to guide in adverse situations, for example:
- If 3 consecutive operations with losses occur, stop trading for the day and analyze the causes.
- If one occurs drawdown more than 12% during the month, reducing the size of the position X%.
- Occurs if a drawdown greater than 15% .. 17% during the month, stop trading for the rest of the month, analyze the causes and take corrective action.
- It occurs if a drawdown greater than 25% during the month, stop trading (minimum 4 weeks), review the plan and method of trading, consult an expert trader or mentor before slowly return to trading.
- Formulas Auto-reward as an important psychological support, because when given a prize helps maintain motivation, reduces stress, prevents effect “burning” with an activity … (eg taking a few vacation days if during the month is achieved 20 % above the target).
The concepts of Money Management usually appear in the last places in the list of priorities of most traders and unfortunately only serve when and usually too late to have ruined the account. So it is the duty and one who operates in markets caring the most of your Capital responsibility .
Related articles: