Tagged: risk management

Top 10 money management rules

1. Pick a side! Bulls make money, Bears make money, Pigs get bulldozed.

In other word, do not be greedy! If you are bullish, do not expect to enter at the bottom of a move and exit at the top. If you are bearish, do not expect to pick the exact market top and ride the market all the way to the lowest low. Making money is our main concern, not catching tops and bottoms.

2. Any fool can get into a market, but it takes a pro to get out right.

Market entry is certainly an important element of successful trading. However, exiting the trade is even more important. Often, a trader allows a market to go against him or her for far too long and way too far, which translates into big trading losses. Remember, money is made when a trade is closed. A perfect entry with a lousy exit will still net you a loss.

3. Use protective buy and sell stops.

One major mistake that many traders make is not using protective buy and sell stops when they enter a trade. Or, traders pull their protective stop order hoping the market will turn in their favor. This is contrary to why we enter stop loss orders in the first place! Do not use mental stops, unless you are a disciplined and experienced trader already who can keep your emotions in check. Determine where to place protective buy and sell stops BEFORE market entry.

4. Do not bet the farm.

Risking a large percentage of your trading account on one trade is stupid. Remember, even professional traders have more losing trades than winning trades over time, and no one can be certain of the outcome of any one trade. The key to success is minimizing losses on the more numerous losing trades and maximizing profits on the fewer winning trades.

5. Cut losses short and let winners ride.

Using a pre-determined protective buy or sell stop will cut trading losses short. Using a trailing protective stop on trades that become profitable allows one to maximize profits on winners and ride it for as long as the market allows.

6. Only the markets know for sure.

Do not ever think you know what a market will do at any given point in time. One of the biggest advantages for sound money management is knowing that you do not know what a market will do at any given time. A recipe for disaster is thinking you know what a market will do. Remember the old trading adage that markets will do anything and everything to fool most of the traders all the time.

7. Be humble and trade according to your plan.

When trading profits are taken, be glad that it was not a trading loss. Do not grouse because a bunch of money was left on the table so to speak after exiting a winning position. A good trade is when you have followed your plan, entering and exiting on the levels you identified and stick to it. It does not matter if you made a profit or a loss.

8. Be careful when selling options.

There are some traders who sell options on futures to make their trading profits. There are many traders that do not. A veteran speaker at a trading seminar once said that he made over 40 trades selling options in a year with 97% winners and still lost money. Remember the old saying, if it sounds too good to be true, it usually is.

9. Do not overtrade.

Trying to trade too many markets at one time is not good money management. If you run into a losing streak, cut down on trading and do not try to trade more markets to quickly recoup lost money. Revenge trading decimates countless trading accounts.

10. To succeed at trading the markets, one must first survive in the markets.

Be conservative with your trading account and trading methods, especially if you are a less experienced trader. Go for those base hit trades. Do not swing for the fence and try to hit a home run all the time. Traders need to survive to trade another day, even if they have to absorb a few losing trades along the way.

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