The secret that helps you make profits safely is not from the trading strategy. It comes from the money management strategies in trading.
“In trading, it doesn’t matter whether you are right or wrong. What matters is how much you make when you’re right and how much you lose when you’re wrong.” – George Soros
You may not know Soros’ win rate is only 23%. You don’t hear wrong. The so-called genius of speculation has an extremely modest winning rate. But if we take the time to read, his wins are stunning.
– The short selling British Pound in 1992 brought Soros more than 1 billion USD.
– The deal crashed the Thai Baht (1997) with a total estimated profit of about 800 million USD.
– The short sale of Japanese Yen (2013) made a profit of more than 1.2 billion USD.
George Soros became a billionaire just as he said. Lose the least when wrong and win the most when right. And it is encapsulated into 2 words: MONEY MANAGEMENT.
In this article, I will write about 3 topics:
– What is money management? Why should we do money management in trading?
– Principles of money management.
– Money management strategies in Forex and Gold trading (applied to all markets).
What is money management in trading?
Money management in trading is the process of controlling your investment amount.
There are two important issues in money management. (1) Minimize risk and (2) Keep profits safe during trading.
For professional traders, money management is the work of controlling risk in the trading process. And money management is no other than emotional management.
Why do we need money management in trading?
Has anyone told you the market is like a battlefield? It doesn’t print money and everyone tries to take money from each other. Even the trading brokers are trying to “eat up” your money.
Therefore, your first lesson when entering the market is to adapt and survive. To achieve that goal, all you need is money management.
There is a general rule on every market you participate in such as Coins, Stocks, Forex, Commodities, etc. As long as you have money in your account to survive long enough, profits will come naturally to your pocket.
Solve psychological problems
The game of money is a psychological game. It’s not that you analyze or predict the market wrong. But the problems lie in your mentality. Is it good enough to do exactly what you planned? How to overcome the psychological issues?
The answer is the same – Money Management. Why do I say that?
If you know in advance how much money you will lose, your mentality will be much more stable. For example, you can earn $3000 per month and each trade you make will lose $30 (only 1% worth) of your total monthly income. So what is there to fear?
Aim for profit
Now, take a look. Every time you open a trade, you play a probability game. Although the probability of winning will be high, there is still a certain loss rate.
So how can you win the most when you’re right and lose the least when you’re wrong?
The answer is still Money Management. Only then will your account be profitable.
5 principles of money management in trading
The successful mantra in trading is cut loss. If you do it well, you will earn money.
The holy grail in trading also revolves around only 2 words – Cut loss.
It’s not sure you will make money after knowing how to make a stop loss but you will survive. On the contrary, it’s no doubt that you will lose money if you don’t use stop-loss. Remember, it’s 100%. Don’t believe it? You can try.
Stop unrealistic dream
When I started with Forex, I used to think that I would be financially free and become a rich man. I can go anywhere in the world and buy whatever I want… Has anyone infected your head with those things?
The more you expect, the more you are disappointed. The more you are disappointed, the more negative you are. These will make you lose over and over again. It’s like a vicious cycle
Let’s try to lower your expectations, set small goals to survive and adapt. Then make small and steady profits. You will be like a child learning to crawl, to walk, to speak…
If from the very beginning, you think of making a lot of money, you will be disappointed. But if you think it takes money to learn and adapt, then when you get small profits, you will feel much more positive.
Try to do everything slowly. You don’t have to be fast. The market will still be there. The opportunity to make money is always there. There’s no need to rush.
Slow means to have a clear trading plan, sit back and wait for the market to create “delicious” opportunities to trade with your money. Be ready to use stop loss when you’re wrong. And dare to wait for the price to reach the profit-taking level.
When you have a slow mindset, you will learn patience. You will not get carried away by the market. You are also willing to pass up the opportunity to keep your money safe.
Slowing down a little bit, breathing deeper, and patience are the foundation of all money management strategies in trading.
Planning is an important preparation step. In money management, you need to know in advance exactly how much you will lose for each trading decision. Of course, the plan is just on paper, but without preparation, you will be in chaos.
Sticking to a plan is also the best way to practice discipline in this tough and risky market.
Learn how to win big
Most traders use the loss-holding strategy very well but their profit-holding skills are not that good. This is a psychological disease that the market sows in the trader’s head.
If you use stop-loss right but can’t take profit enough, the result is that you still lose money.
I often call this problem “Early profit-taking”. For example, when you’re wrong, you use stop loss and lose $50. But when you’re right, you only win $20. In general, the account is still at a loss.
I have written in detail each money management strategy in trading. Now I’ll just repeat it and put the article links in. Please click to read, understand and use accordingly.
3 Money management strategies you should learn in trading
The 2% rule and Trailing Stop
For each trade, you can only lose up to 2% of the total money in your account (2% rule). For example, you have $1000. Then you can only lose up to $20 in one trade.
What about Take Profit? I encourage you to use Trailing Stops to maximize profits.
And here is the tool to help you calculate lot size. Lot size calculator.
R:R ratio is suitable for Day Traders – intraday trading, with clear Stop Loss and Take Profit.
If your trading strategy is stable, you can combine it with a reasonable R:R ratio to make as much profit R as possible.
“When your prediction is right, you have to throw continuous kicks”. Use Profit-holding to increase profitability when the market moves in line with your prediction.
3 Money management strategies you should avoid in trading
Martingale betting system
Double when you lose – Continue until you have nothing left. This is the truth of the Martingale betting system.
But the point is how much your mental strength can handle. The game of money is a game of psychology. When you trade with large amounts of money, the psychological pressure will be great.
As fear takes over you, the more you try to trade, the more wrong you will be. With Martingale, consecutive mistakes will burn all your money to ashes.
This is the suicide money management of many traders, especially newbies. When their predictions are wrong, instead of using stop-loss, they hold loss and hope that the market would bounce back to break even and gain some small profits.
Of course, with the Loss-holding strategy, sometimes they escape from the hand of Death. But sooner or later, they will lose everything in their account.
All-in is to put all your money in a single trade. I have talked about 2 ways: (1) Active all-in and (2) Passive all-in. You can find the detailed article here.
I have been in this market for more than 8 years. Most of the teachers or traders who share experience will talk about the method of placing orders first and how to manage money later.
I think the opposite should be done. Learn how to manage money first and learn trading strategies later. I have shared the reason clearly. You need to survive before thinking about making money.
With good money management, you will control risk and emotions in trading better. These are my thoughts. What about you? Let’s leave a comment below to discuss with us.