My Money Management rules….
We now have the edge over the other traders which places us in a high probable direction of the market at minimal initial risk. But there is one more important topic which is not related to our charts. Having a positive expectancy strategy means nothing if you don’t put this in your trading plan. That is what we call Money Management.
As the name suggests, this section of our plan includes how we are going to use our trading capital. How much we are going to risk in the trade and when shall we stop our trading day etc. etc… Let me repeat again, you cannot survive without money management rules even though you have a strategy which is successful 90% of the time. A trader with a 50% success ratio and with a sound money management rules beats the trader with 95% success ratio without proper money management rules. That’s how important it is…
Again, money management rules are of personal preference. As a thumb rule, we should only risk the amount which when lost will not affect the next trade both psychologically or financially. You should only risk the amount you are ready to lose so that you can focus on executing the trading plan without any fear of losing the money.
I am presenting my money management rules. Build your own depending on your psychological tolerance of money loss.
My Money Management Rules :-
Initial risk per trade should not be greater than 1% of the total trading capital. That means if my capital is Rs.1,00,000, I will not risk more than Rs.1000 in a single trade. It doesn’t mean that I adjust the stop loss depending on this risk amount. Stop loss and the entry are fixed as per the strategy. We must adjust the position size of the trade to contain the initial risk.
If I lose 2% of my trading capital in a session, I step aside from the trading computer to clear my mind for about 30minutes and revisits the platform once I completely flushed away from the previous trades from my mind.
3% is the maximum amount I can lose in a day. If I lose 3% of my capital in a single day, I will stop trading for that day.
If I lose 5% in a week, I will not trade next week.
If I lose 30% of my capital, I will stop my trading and shift to simulation for practising my strategy for about one month. Once I am comfortable with trading in simulation, I will revisit the market in realtime.
Risking only 1% of your capital on a single trade keeps your mind relaxed as losing that minute amount means nothing in comparison to our capital. Don’t trade with very limited capital risking more and more. If you risk more, especially in the initial stages of your trading career, you will definitely lose your complete account. So, prepare your money management rules and follow them to the dot to survive in this trading arena.
Your trading plan is incomplete without proper money management rules.