Trading is all about risk and money management. First learn how to manage your risk and only then think about profits. Many new traders make the mistake of ignoring money management in the beginning but when they get their fingers burnt, they realize the importance of a good money management system. You don’t need to risk all your money on a single trade that you may or may not win. This is permissible in gambling but not in trading. In trading, you learn to survive by placing only a small percentage of your money at risk that is appropriate with the volatility level in the market on a single trade. Get these three stock trading reports written by battle hardened investing professionals FREE Turn two hunderd dollars into hundred thousand in 2010 with this Penny Stock Trading System. Watch these 4 FREE Forex Day Trading Risk Shield Videos that will change the way you think about risk and money management.
Now over the years many different money management systems have been developed by traders. These different money management systems are used to calculate the position size for each trade. Most of the trading softwares now include the money management calculators with them. You only need to understand the concept behind each money management system if you want to use them in your trading system. A good trading system or for that matter a good investing system has a solid money management system as its backbone. There are many different money management systems. Let’s discuss the pros and cons of the most common money management systems.
Now before we do that, you need to understand this fact that different markets may require a different money managment system. It is due to the different levels of volatility in these markets. For example, in stock trading, you may need a different money management system as compare to in forex trading or futures trading.
Fixed Fractional Money Management System is the most basic and the most widely used among the traders. Under this money management system, you limit your risk to a fixed percentage of your trading account. Usually this fixed percentage is between 2%-10%. For more riskier trading strategy, you don’t risk more than 2% of your trading account on a single trade and for less riskier trading strategy, you may risk as high as 10% of your trading account. As a rule of thumb, don’t risk more than 2% of your trading account on a single trade as long as you don’t develop more trading experience. The second most basic money management system is the Fixed Ratio Money Management System. It is widely used by options and futures traders. If you want to trade options and futures, just type the name of this money management system on any search engine. You will find the formula.
Another money management system is the Martingale System. It has its root in gambling and casinos. But many traders love to apply it in trading as well. Under the Martingale System, you start with a set amount of money, let’s say three thousand dollars. If your trade succeeds, you trade another three thousand dollars. But if your trade loses, you double your amount to six thousand dollars. You keep on doubling the amount, until you have a winner. You might have heard about Doubling Down in a Casino. Well, this is what it is. Under the Martingale System, you will always come out ahead as long as you have an infinite amount of money. The problem is you can run out with your money before you have a winning trade.
