Choosing A Money Management Strategy

By Author: Markus Heitkoetter
Total Articles: 11
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Money management is one of the most important elements of trading for any successful trader. However, this is an aspect of trading that is often overlooked. Before you can incorporate a money management plan, you must evaluate your trading. These are the steps to take before incorporating money management.
There are many types of money management that traders can apply. Some of the best-known methods, and probably those methods which are best for the beginning trader, include Fixed Percent, Optimal F, Fixed Fractional and Fixed Ratio money management. With all of the many money management options for the beginning trader, how can you be sure the strategy you choose will work for you?
Regardless of the money management method you choose, the best method for you will be the one that is acceptable for your account and your emotions. It is also important to take your psychology into consideration when thinking about an appropriate money management method. There are several things that you can do to prepare yourself before attempting to pick a money management strategy.
First, you must plan out your trading. ...
... Your trading plan should include things such as which markets you would like to trade, what your starting capital is, when are the best times for you to trade, and a good trading plan should also include your trading strategy.
You must also have rules that are specific to your trading routine. Giving yourself rules will help to keep you from blowing out your trading account, and letting your emotions get the best of you. Your rules can be simple, such as, I will not trade on my birthday. However, you can also choose rules that help you limit your risk, such as I will stop trading after I have lost $____ and evaluate my trading. The rules you set for yourself will depend on your trading, personality, and psychology.
Once you have decided on your trading plan and rules, you need to outline them. In order to successfully follow your plan and rules, you must incorporate them into a living document. You are much less likely to follow a plan if you do not have it written down in a place where you can check it often. Knowing the plan in your head will not do. You must write everything down and refer back to it frequently during your trading.
Finally, you must understand your trading psychology. What is your risk tolerance? How do your emotions typically effect your trading? Are you quick to move, or do you need time to think things through? All of these questions should be answered before you incorporate any type of money management. You will find answers to these questions only by trading. Generally trading on a simulator will give you a good idea of your trading psychology, and as time passes you will become more familiar with what you can typically expect from yourself while trading.
Once you have determined your trading plan and rules, have written them down and followed them while trading, and have determined your trading psychology, you are ready to pick a money management strategy. No money management strategy will be right for every trader. Different traders come with different trading accounts, different goals, and different psychology, and all of these things will factor in to the money management method you choose.
If you would like to learn more about money management strategies, try out our money management course at Rockwell Trading. Our money management course explains several money management methods in depth, as well as how to incorporate them into your trading.
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