The most important element in trading after trading psychology is money management. Money Management is an art. The management of capital by applying tight capital risk management is called money management. New traders usually neglect it and their focus remains on gains .In order to survive in the market, a trader must know how to manage capital.
It must be remembered that trading is not getting rich scheme overnight. Everyone must be prepared to face all kinds of situations of markets. Usually newbie do many kinds of mistakes in trading like lack of knowledge, money management, not to cut loss.
Lack of knowledge
The most important thing is to educate yourself about trading. A trader must be e Trading is an art. It needs proper knowledge and experience. Make sure to get adequate knowledge and skills before you embark your journey. A trader must be equipped with proper knowledge of trade. Usually new traders don’t pay attention towards learning process and take it for granted. The ultimate result is loss due to lack of knowledge.
No money Management
Money management plays crucial role in trading. We can say that money management is base of trading. No trader can be successful without money management. Mostly new traders put big amount of their capital in single trade and hope for smart profit. They don’t think about possibility of loss in trade.
No cut losses
Another big mistake done by the newbie is that they don’t use stop loss strategy. Not cutting losses is the major cause of loss in trade. People don’t like even to imagine the loss. So they continue to wait in hope that at the end they will get profit and this approach becomes the cause of their account wash.
Market is unforgiving of any kind of mistake. You can earn money for years but can lose in seconds if you don’t take risk management measures.10 years ago there were attacks in the USA, flash crashes, some shares lost 90% in value in 5 minutes. If you will not pay attention ,then your trading life will be very small.
The money management must address these questions specifically.
1. What is the percentage of your trading account balance that may be allocated for a specific trade?
2. In you have to face loss, how much capital is available to resume trading activities?
3. What degree of leverage is to be used for a specific trade?
There are different money management methods. The adoption of money management strategy to employ depends greatly upon the personality of the trader and the overall scope of the trading operation. Whatever is the strategy, It must fit the trading methodology, capital inputs and goals of the trading operation as a whole. Money management doesn’t guarantee profits or losses, but helps to optimize the effect of winning trades and reduce the impact of losses.
The flat risk method is the most basic type of money management strategy. One risks a constant, predetermined portion of capital on each and every trade in pursuit of an acceptable profit. The flat risk method is relatively simple. If a trading account has a balance of US$25,000 and a risk tolerance of 3%, then the maximum amount to be risked on any given trade is US$750.This trade has no effect upon the next trade’s risk value. It remains the constant 3% of the initial account balance.
According to Kelly Criterion describes that increased capital risk is justified by a greater probability of success. For instance, if a trade has a 90% probability of success, then the appropriate amount of capital to be allocated is much greater than a trade with a much smaller (10%) success rate.
Day trading is probably the safest of trading. In this method only small number of positions is focused. Positions are not held overnight. Many traders face loss in day trading due to poor money management.
A trader should use volatility based stop loss. setting up stop loss when there is higher volatility and closer in times of low volatility will be helpful for trader to react according to market situation and then risk reward ratio can be optimized.
Many traders concentrate that how many units they should buy and them they set their stop loss. First of all determine your stop loss distance.
Your goal should be to minimize your loss and preservation of your capital so that you can make profit in very short period of time.