Profitable trading starts with good money management

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Have you noticed how difficult it is to make money from trading the financial markets? And why a large proportion of traders lose money? Is it possible to make a living from trading? Yes it is, but you must be prepared for it, you must accept that money can not be made every week and you must have the right mentality to do it.

The answer is simple, and it’s due to a combination of factors including having little self-control and over or under-trading. If you are losing money from your trading make sure you adhere to these guidelines:

  • Know where to set your stop loss and place it routinely with every new trade
  • Run your profits and cut your losses
  • Use discipline to apply the rules as stated by your strategy
  • Have patience to wait for the trades that offer a high probability of success
  • Have a clear understanding of what could trigger a sudden swing

 

Having a plan that works is essential, any profitable trader who has a proven entry and exit technique has an increased probability of success. The difference between a swing trader and a day trader is that a day trader has to work harder than the swing trader. The day trader must place trades with precision; if a trade is opened too early the stop loss is at risk on the flip side if the entry level is too far out from price action then they risk missing the move. You see, a day trader has a greater chance of losing because his/her stop loss is tight. The tighter the stop loss the more likely you will lose money. This is why I always favour swing trading instead of day trading. Swing traders use a wider stop loss, therefore they have a greater chance of success.

That’s why many day traders lose money, when they get it wrong they are stopped out and when they get it right they have often missed the opportunity to profit from their wisdom. The important thing is to identify the area where to open the trade, not too early but not too far away from the current price, and make sure the potential profit exceeds the potential loss. Then, once you are in the trade make sure you stick to your target. This is important, you need to be patient because if you take profits too early it won’t work.

For most short-term traders profits are made by following the trend. While I don’t disagree with this statement I believe that the factors listed above are just as important as a trend following strategy. Trading with the trend will improve performance but if you don’t have the discipline to hold onto winners and cut losses early or if the stop loss is too tight it could end up being futile.

If you adhere to these guidelines you should make money, this is how good traders make money. Here are some quotes on money management from some of the most successful traders:

“The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.” Ed Seykota

“Letting losses run is the most serious mistake made by most investors.” William O’Neil

“You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael [Marcus] taught me about making your best judgement, being wrong, making your next best judgement, being wrong, making your third best judgement, and then doubling your money.” Bruce Kovner

“Learn to take losses. The most important thing in making money is not letting your losses get out of hand.” Marty Schwartz

“I think investment psychology is by far the more important element, followed by risk control, with the least important consideration being the question of where you buy and sell.” Tom Basso

Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk

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