Let me start by saying a monkey can place winning trades! If you don’t believe me look at this link (click here).
The trick is to manage your money well. I don’t think the monkey could decide where to put their stop loss or decide where to take their profits.
There are a couple of key things to look at when talking about money management.
- Is trade management
- Account management
Individual trade management is very important
You never want to be over-leveraged in one particular trade. This could lead to being anxious about the outcome and poor decision making. On the other hand, you don’t want to have an unrealistic target or stop loss. Before entering the trade you need to decide where are you wrong? What is your potential target?. Another key factor would be.
How long should you expect to be in the trade?
This is largely determined by what timeframe you are trading. If you are trading on the daily timeframe you could expect to be in a trade for 1 week or more – if it goes well that is. If you are trading the 15-minute timeframe then your trade could last a few hours.
Account management – What should you be risking on trades?
It is essential to manage the amount of risk you take per trade depending on the size of your trading account. Once again if you are over-leveraged on your account, then this could lead to trading anxiety. Having a maximum drawdown level and a clear target can be the difference between trading success and failure.
We recommend taking no more than 2-3% risk on any one particular trade. This ensures that if you lose the trade it does not lead to ruin. If you trade with a 1-2 or 1-3 risk to reward the trade could lead to a 4-6% gain on your account which is healthy.
Managing the two together is very important. One cannot be done without the other. If you trade with a small account we also have strategies to help you grow your account to a larger level. Even this has to be done methodically. Trading College is here to guide you through the process.
How trading Timeframes affects money management
Overall there are many ways to manage money, but it does depend on the timeframe you are trading. If you are a day trader and trade the intraday timeframes (daily chart and below), then you may not need to hold risk for that long and be exposed to the gaps on the weekend. If you are a swing trader, the trades are capital intensive and more margin will be needed on the account to keep wider stop losses. Swing trading could require more patience and therefore you could have fewer opportunities. Day trading is more volatile but you are not left with overnight risk, and you are not subject to gaps that can occur when companies have announcements or news stories break.
Managing your money is very different depending on which timeframe you choose
If you are swing trading have a look at what your maximum drawdown could be and divide the number of trades you are holding at any one time by the figure. So if you have a 10K account you may only want to risk a maximum of 1K at any given moment. This could mean you hold 5 trades with a stop loss of 200. This ensures that you are protected.
It is also important to be realistic with your stop loss distances. Day traders do not need to worry about this. They would need to choose a certain amount of risk per day and maybe even split this number by the number of trades they would take in any given day. There are obvious advantages and disadvantages to both methods.
At Trading College we would look to help you work out which strategy could be good for your particular trading style.
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