Let’s make a Review on Simple Money Management Strategy
Many successful traders confess that profitable trade on the stock market assumes three ingredients: self-discipline, trading system, and appropriate money management.
Today we will focus on money management. In this article we will try to understand what money management should be to allow a trader always be in the money. We will try to give some survival guide to make your trading profitable.
Money Management – what is it?
In every financial market today Money Management is one of the most important factors, and at the same time, one of those, which traders usually pay very little attention to.
Actually, money management is essentially the knowledge how to operate your deposit to trade at a profit for a perceptible time. Making one or two trades at a profit is not enough; successful trading is determined by the long-term profit.
Money Management is the process of optimal and strategically calibrated cash management in order to maximize profits.
Rules of Money Management Strategy
The first thing advised by experienced traders is to choose the right sum from the deposit. If you want to trade large sums, then the deposit must be appropriate. But to work with such a deposit, a trader ought to have enough experience, so it is better for beginners to start with a little deposit and to trade with small sums. Learn from small!
The acceptable risk for making trades is practically admitted in the amount of 5% from deposit. It is desirable for beginners, at least for the first time, to establish the risk of 2% of the deposit. That is, if your deposit is $100, you can afford to take the risk to lose only $5.
Perhaps, your earnings will not immediately be such as you expected. Although from the other side, you will be able to reserve your deposit.
Thus, perhaps, the most important rule in money management is to avoid entering the transaction in case the take-profit does not exceed the amount of potential loss twice or thrice, where there is a stop-loss. Certainly, this is of little importance if you trade in binary market, since the magnitude of the potential profit and potential loss are approximately equal there, we just would like to see you get the idea.
Rule #2 is connected with the first. Avoid opening more than one transaction, notably if you are a novice. This error is also native to those ambitious beginners loaning to earn a lot and immediately. They are trying to trade on the various tools, trying out various raw materials, currency pairs, stock indexes or stocks themselves. Mostly, such kind of a trader opens a few transactions at once. Remember the risk imitation rule and try never to depart. When opening several transactions at once, the risk from all of them mustn’t exceed the values you set.
At last, let’s consider what leverage is. It won’t be a discovery if we say that with the less leverage, the chance of getting a real loss is less, too. Experienced traders recommend not to trade with a leverage bigger than 1: 100. Earnings with a larger leverage is higher, but the risks are growing too. And the risks must be controlled.
- MM is a necessary thing in binary trading and in trading in general
- There are quite many methods of MM: you can choose the one you find the most convenient
- Most MM methods work like a safety cushion (in case of a loss you can return your money)
- The profitability may be lower but it’s a peculiar payment for ability to get the loss back
- You may need more money (for example, Martingale’s method requires a deposit 15 times bigger than an operative deposit). You will need this money to make four steps according to Martingale.
Even if you have found the best and the most profitable strategy ever, even if your self-discipline is at the highest level, it’s hard to reach success trading in the financial markets not using money management. You are sealed to merge all of your deposits until you understand this truth. Just like before you, it was done by hundreds thousands traders everywhere. However, it is still more reasonable to learn from other people’s mistakes than from your own.
That’s all for now. Got any questions? Just ask the expert!