Money Management

Money, a Tool for Trade

Money is just a tool for Trade in real terms besides other tools like the trading system, timing, sentiment and other economic and political factors. When money is put to work, it should produce an output. This output is nothing but profit. When money is used like a tool, beware you need to use it properly, with proper Risk Management and knowing exactly how to retain those money during unfavourable conditions. These techniques help you to assess your equity strength and taking action at appropriate times that help your money grow. To maintain all these tools, you need a Journal that you will jot down all those trades and their results. This gives you a fair chance to analyze all your actions as where you acted smart and where you went wrong. Money Management is a combination of these factors that determine the equity strength.

Planning your savings vis-a-vis your earnings is the first step towards building wealth. How much can you save out of your earnings and what type of trade is suitable to your mental style and the probable risk associated with it and how to tame them are to be well thought of before taking up trade. When you understand them well you can slowly start taking small trades and along the path, you will come across new techniques and learn gradually in this exciting world of Stock and Currency Trade.

When you start to do a business, you forecast about the probability of profit, forgetting the loss probability that is hidden and associated with it. It is prudent to access the loss probability that could come on its way. Therefore, the Trader should analyze the loss probability and should ask the question whether this loss could affect the lifestyle that he is enjoying right now.

Therefore, risk to loss and reward to gain should have a correct ratio in order to build wealth. The experienced and seasoned Traders have their Risk to Reward Ratio to 1:3 and make themselves available for trading for a longer time.

The secret formula to successful trading lies in the Money and Risk Management itself and not in the other emotional systems. There is no holy grail that the markets should behave in the formulated trading system. The markets are so inconsistent that it does not move in the same direction always. It is the technical analysis that help you to stay away from irrational markets. The volatality sometimes does not understand the technical analysis and moves too far South that it hits the leverage of the average trader. The Risk Management plays a very important role at these situation and it stops you out from the losing trades much quickly than even you think. It moves sometimes at the speed of thought that humans go out of clue.

A wise Trader takes up huge volumes of trade over a longer period of time, moves one at a time in small proportions. He never puts in more than 10% of his equity in one trade and puts a stop loss at 5% of the executed trade. It is explained in the following illustration.

Equity Balance : 10,000$
Trade Committed 10% of Equity : 1,000$
Stop Loss 2% of Trade Committed : 20$
Profit Margin 6% of Trade Committed : 60$
Risk to Reward Ratio : 1:3

The above formulae helps the Trader to recover from his losses at every single win to every 3 loss. When there are 20 trades, the number of winning trades will improve and can put the Trader into a sizable profit.