Trading is an individual sport. As an individual sport, you are forced to wrestle with a lot of prominent topics of trading successfully on your own. A tough concept to learn is that you cannot out analyze or cherry pick your way out of a strong money management plan. The history of trading is littered with traders who believed they could escape this necessary aspect of a trading system.
A famous quote brings about how a truth like the necessity of money management to a trader is initially perceived and ultimately accepted:
This fully applies to your trading but instead of truth being discovered on a social level, this truth hits us individually in ways that are tough to accept. The quicker you realize the prominence of money management in your trading system and accept its value, the better off you'll be.
Let's walk through the three stages of accepting this truth from a new trader's point of view.
First, the value of money management is ridiculed.
It's often said that the worst thing that can happen to a new trader is to have a row of winners to start off. The novice trader will believe trading to be the easiest thing in the world and will ridicule the thought of limiting trade size or closing out a losing trade too early. Often, he will begin increasing his trade size because of the inflated confidence until a market moves against his trade. All of the sudden, he feels the market is out to get him. Had he managed his risk on every trade, his account would have held steady through rising and falling markets. Thanks to FX trading, you can find trade opportunities in both rising and falling markets.
Hopefully, you come to the understanding that a trading career is made up of a thousand little trades so managing your risk is of key importance.
Second, the value of money management is violently opposed.
In no uncertain terms, this is where most trading careers die. Few come through this stage unscathed. Even the best traders have experienced this violent opposition in the beginning. A favorite book in most traders' library is Jack Schwager's, Market Wizards, Interviews with Top Traders. A common theme through this book is that these traders didn't fully respect the risk they were taking on when they started.
Unfortunately, after a few losing trades they increased their trade size in order to make up for previous losses. This was a big mistake. Their account went down further after increasing the trade size and applying it to a faulty system. This is referred to as revenge trading or doubling down and often wipes out accounts as traders increase their trade size to make up for a string of losses. As this group violently opposes proper trade size their account shrinks.
The outcome is sad and often ends their career as a trader.
Socially, think of Copernicus when he stated the earth was not the center of the universe. His followers were placed under house arrest until this truth emerged as self-evidentHe was jailed and then stoned to death.
The good news is that if you come up successfully on the other side of this stage and develop a strong Money Management plan, you can succeed on the grand scale.
Third, Money Management is accepted as being self-evident to trading well.
This is where we hope to find you today or very soon after this article. When money management and limiting your risk is seen as the self-evident path, each trade will take on a new meaning. The opportunity is always there. Now, however, the risk is limited so as to never get out of hand. This means that you can spend all your time looking for a high probability entry with a good risk reward ratio. Most of fear or stress that you experienced is gone. The trade may very well not work out, but with a risk management plan, that's OK.
After you've accepted the merits of a good risk management plan and designed one that meets your personality, you now have a type of insurance policy against losing a large amount of your account.
If you are unsure about the key aspects of a strong money management plan, watch this video now. Lastly, even though not every trade will be a winner, you can still improve on every trade as a trader by reviewing your trading journal .
---Written by Tyler Yell, Trading Instructor
To contact Tyler, email firstname.lastname@example.org or follow me on twitter at @TyellFX
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