5 Money Management Tips Successful Traders use
Money management is one of the most important aspects of trading. However, for most traders it’s largely ignored. Your most common trader will tend to spend a lot of time improving their trading strategies, but not much thought is given to the money management aspect of trading.
We want to help you with that. So here are 5 money management tips to help make it easier for you to manage your money while trading.
1. Set realistic goals
Unrealistic goals might be a serious obstacle for many traders. While there are traders who do achieve very high returns, it could be that they are more experienced and are trading with a higher equity.
For example, a 10% return on $1000 is not much when compared to a 10% return on a $10,000 starting capital. Greed is an emotion that needs to be checked, and it must not rule your trading decisions. By having a realistic goal, you are much more able to better equip yourself emotionally by sticking to the trading rules outlined.
2. Watch Your Risk-Reward Ratio
This rule means that if you risk $200 on a trade, you should ideally make $400 in profit. This is an essential element to money management and one which combines both the money management and the trading strategy aspect.
This ratio is used for a good reason. For every winning trade, you can recover the losses from the previous losing trade and make a profit as well. The 1:2 risk/reward is also beneficial as it can help you recover your losses by a trading strategy that offers 50%-win rate, if you follow the rules.
3. We are the 1%
The 1% rule in money management states that you should always expose more than 1% of your equity to a position. For example, if you are trading with $10,000, you should allow not more than $100 of risk per trade. Easy, right?
While this looks straight forward, it is a bit more complex than that. If you scale down your lot size to 0.01 or micro lot, then your stops can be placed 1000 pips from your entry. But if you trade with 1 lot, then your stop loss must be no more than 10 pips. Get it?
4. Don’t Over leverage
When a trader chooses a very high leverage for their account – it’s usually a bad sign. It doesn’t have to be bad, provided a trader knows how to make use of this leverage correctly. Generally, traders who have a high equity tend to use lower leverage around 1:10 or 1:50.
For example, a trader could use a leverage of 1:400 on a $10,000 account but still stick to the 1% money management rule. The advantage here is that by increasing the leverage, there is a wider scope for the margin and a margin call can be avoided.
5. Trading with matching instruments
Most traders randomly choose a trading instrument without knowing that decision can have wide implications on their money management. For example, trading on unusual currencies where the spreads are usually around 50 pips or more might be disastrous.
You would have to end up compromising by accepting a less than 1:2 risk reward ratio. Not something you want. By sticking to the most liquid currency pairs or instruments such as the majors, the low spreads can help you to better manage your trades and be exposed to less risk.
To sum things up, money management is a highly important part of online trading. We hope that by applying these 5 tips, you will not only manage your funds better, but also become a more profitable investor. Good luck!