Money Management Strategy: Key to Successful Trading

'Money Management, Money Management, Money Management' is to trading success what 'Location, Location, Location' is to determining the desirability of a property.

‘Money Management’ is the simple part of trading, yet it can have such a massive positive effect on a trader’s aggregate bottom line performance. Time and again I come across traders (usually struggling traders), who fail to successfully heed the lessons of 'Money Management'. Perhaps it is not surprising. 'Money Management' gets no more than a brief mention in the trading literature; barely eliciting more than a few paragraphs, or perhaps an addendum at best. On the other hand, have you ever tried reading a book on Money Management, they are few and far between, and you'll be lucky if you manage to stay awake past the first few pages.

Therein lies part of the problem, 'Money Management' is not the sexy part of trading. Finding a winning trading strategy for optimal entry and exit, finding a formula for the world’s greatest trading system which turns keystrokes into gold, gaining the right mentality to overcome the emotional battles, these get all the attention: How often have you heard someone talk about their excellent bit of ‘Money Management’ that day? Exactly! Sure you hear tales of people ‘Who sold the top’, ‘Bought the low’, ‘Stayed with it’, ‘Doubled-up’, but I bet you don't often hear ‘I restricted the loss for the day to 1% of capital’, or how about a colleague telling you over a few beers, how they ‘position-sized so they could lost no more than x amount of $’, or they decided not to trade because ‘The Risk/Reward set-up was poor’. Those discussions do not happen very often.

I was recently at a trader’s forum talking about trading and trading psychology, I was inundated with the people either asking me if I am using the right strategy, or where the market is heading. All pretty meaningless questions without context, but when I asked them if they had a money management strategy, the best answer I may get was, 'I always use stops'. That was it, the most important part of trading, the part that keeps you in the game and on track for success, reduced to 'I always use stops.' Trading seems unique, if most people started a business I am sure they would pay the utmost attention to cash-flow, liquidity, their incomings and outgoings, how much they can devote to expenditure and costs, etc. Yet in trading, these basics are too often ignored. There are exceptions, in many cases these are the successful traders who have been racking up the profits consistently for years. I know of one very successful trader who told me ‘Money Management was everything, all else was subordinate to his money management’.

Enjoy your trading day.