Money management is an often ignored topic in trading because, frankly speaking, no one is interested in the topic of how to lose money properly. What everyone wants to know is how to win money quickly and if you are writing books on trading, it better be something about trading techniques that show the readers how to pick the tops and bottoms. For money management related trading books, all of them focus on the concept of optimizing the potential profit. People are just too busy seeking for that next best trading strategy. They will worry about money management issues later because many of these traders think that they do not have a lot of money to start with anyway so being conservative could reduce their chances to succeed in trading.
It does not sound right when we put conservative thinking like defensive money management together with speculative activities like trading and daytrading in the same sentence, does it?
Why would anyone engage in speculative activities like trading would think conservatively at all?
Well, those who successfully make a living through trading everyday (or those who successfully grow their capital with part-time trading) and end their trading career at their terms (i.e. choose to retire and stop engaging in financial speculations) would tell you otherwise. I call these individuals achieving practical success in trading (in my eBook Know your odds before you trade). Being defensive in the money management aspect of trading is one of the most important factors that drive the success in many retail traders' trading careers.
But what is defensive money management anyway?
How do you tell the difference between financial speculation and gambling your money away?
Principles of Defensive Money Management
ReplyDeleteIn trading, money management in general deal with the amount of money you are willing to risk in order to gain the opportunity to profit from the speculative act. To be defensive in money management, it means that,
◾you have to understand the risk assumed in your trading activities very clearly
◾you have well controlled risk per trade relative to available trading capital
◾you have exact rules in position sizing that help growing the capital base without taking on risk that is not manageable
◾you will stop all high risk trading that is not suitable for your trading account
by Lawrence Chan