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MONEY MANAGEMENT: The MOST Important Aspect of Trading
If you are a professional trader or plan to become one, Money Management is your #1 job. You could be the best chart reader or statement analyzer in the world but if you have poor money management you will still fail. In order to succeed you first have to last, and to last in the trading business you must be able to handle risk and manage it accordingly.
How you handle Money Management comes down to a few simple things:
Risk limits
- This consist of knowing your risk per trade, your max drawdown, and buying power limitations.
○ Risk per trade: This is the amount you are willing to lose if the trade goes against you and stops out (remember to always have a stop loss). Many traders refer to this as Risk Units or simply 'R'. This should be a defined amount that does not vary based on emotion. If you do use different risk for different trades you should have that clearly defined in your trading plan otherwise each trade should be the same. Risk per trade should be around 1% for experienced traders and $10 for new traders as they work towards slowly raising risk with consistency.
○ Max drawdown: This is the max amount you are able to lose per timeframe. For example, a day trader may have a max drawdown of 3R per day, 7R per week, and 13R per month. Max drawdown demands that if you lose that amount in that timeframe you are to be done trading until the next one. This helps traders from spiraling out of control and blowing up a trading account.
○ Buying Power Limitations: Knowing how many trades you are able to take at one time will help define your strategy.
Expectations
- This consist of knowing your expectancy and timeline
○ Expectancy: Your trade expectancy is the most important stat in all of trading. It tells you what you expect to make per trade. In order to properly manage risk you have to be sure that the strategy is worth it. The expectancy stat is how you do just that. For more info about expectancy check out my post on it here
○ Timeline: Everything takes time. Trading is no different. Having a realistic expectation about your timeline and how much you are going to make is a critical element in helping traders stay focused on their goals and not fall into a get rich quick scheme. If you expect your trading career will take 3-5 years to become profitable you will manage your money much better than someone who expects full time profits in under 1 year.
Yourself
- This consist of knowing your personality and trading plan
○ Personality: What is your personality like? Are you a jittery person or are you robotic. Knowing this will help build a management that you can trust and are able to follow.
○ Trading Plan: Make sure your trading plan fits your trading style. You have to take many things into consideration here such as time constraints, goals, and personality. It takes time to figure out what works for you.
If you can determine how to handle these three factors then you will be well positioned to not struggle with money management. After you have the fundamentals written in your trading plan all it comes down to is staying disciplined and following the rules set for yourself. Clearly define your limits, have an expectation, know thyself.
Thanks for reading, follow JLaing for more educational post about Money Management, Trading Stats, and more. I also stream a stock day trading chat room every morning at 9:15 EST right here on TradingView, come check it out and say what's up.
How you handle Money Management comes down to a few simple things:
Risk limits
- This consist of knowing your risk per trade, your max drawdown, and buying power limitations.
○ Risk per trade: This is the amount you are willing to lose if the trade goes against you and stops out (remember to always have a stop loss). Many traders refer to this as Risk Units or simply 'R'. This should be a defined amount that does not vary based on emotion. If you do use different risk for different trades you should have that clearly defined in your trading plan otherwise each trade should be the same. Risk per trade should be around 1% for experienced traders and $10 for new traders as they work towards slowly raising risk with consistency.
○ Max drawdown: This is the max amount you are able to lose per timeframe. For example, a day trader may have a max drawdown of 3R per day, 7R per week, and 13R per month. Max drawdown demands that if you lose that amount in that timeframe you are to be done trading until the next one. This helps traders from spiraling out of control and blowing up a trading account.
○ Buying Power Limitations: Knowing how many trades you are able to take at one time will help define your strategy.
Expectations
- This consist of knowing your expectancy and timeline
○ Expectancy: Your trade expectancy is the most important stat in all of trading. It tells you what you expect to make per trade. In order to properly manage risk you have to be sure that the strategy is worth it. The expectancy stat is how you do just that. For more info about expectancy check out my post on it here
○ Timeline: Everything takes time. Trading is no different. Having a realistic expectation about your timeline and how much you are going to make is a critical element in helping traders stay focused on their goals and not fall into a get rich quick scheme. If you expect your trading career will take 3-5 years to become profitable you will manage your money much better than someone who expects full time profits in under 1 year.
Yourself
- This consist of knowing your personality and trading plan
○ Personality: What is your personality like? Are you a jittery person or are you robotic. Knowing this will help build a management that you can trust and are able to follow.
○ Trading Plan: Make sure your trading plan fits your trading style. You have to take many things into consideration here such as time constraints, goals, and personality. It takes time to figure out what works for you.
If you can determine how to handle these three factors then you will be well positioned to not struggle with money management. After you have the fundamentals written in your trading plan all it comes down to is staying disciplined and following the rules set for yourself. Clearly define your limits, have an expectation, know thyself.
Thanks for reading, follow JLaing for more educational post about Money Management, Trading Stats, and more. I also stream a stock day trading chat room every morning at 9:15 EST right here on TradingView, come check it out and say what's up.
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