If you’ve read my earlier articles, you’ll know that I consistently stress on the importance of money management because good techniques and setups alone won’t save you from bad money management. So it only makes sense to know what good money management is. Fair enough?
Ok, let’s move on to the good stuff.
Money management with regards to trading is pretty broad and can cover several topics. I’m most concerned with trading sizes and monthly maximum drawdowns here.
Being a very conservative trader, I always tell my fellow traders and students that I trade with a true positional leverage of just 1:2. I never fail to get shocked looks from them. And I can tell that they are in disbelief because they feel you can never profit sufficiently with such leverages. Nothing can be further from the truth. It’s about capital preservation … I’m sure you’ve heard about it before.
This means that if I wanted to trade standard lot sizes, I need to ensure that I have at least $50,000 in available equity. Here’s my secret formula … Lot size to be traded = Total Capital / 5000
Ok, now let’s spend a bit of time talking about max drawdowns in a month. Different traders have different mental sets and levels of aggressiveness. For a long time running, I’ve always been using 5% as a guideline for my monthly maximum drawdown. That means if I start the month with $5000 in available balance, should I ever hit a loss of $250, I will not allow myself to take another trade until the next calendar month.
This will train your trader’s muscles which can only help you in the long run. Hope this little article has helped you somewhat. As always, good trading!