I just want to share with you an easy money management rule that you could follow:
Have a 5-2 stop strategy.
It means 5 wins or 2 losses. Whatever number you reach first, you stop trading for the day and you go for example on demo. So if you are for example on a 4-1 win trades and you lose the second trade, then it is 4-2 (2 losses) and you logging off from your live account so at the end of the month you still making slowly profits and not taking too much trades at all or blowing your account.
Also i would like to advise to dont use martingaling as your account could blew up over time with this strategy, its very dangerous.
I have seen variations of this same approach discussed previously here.
Statistically, it sounds very sensible, and in keeping with the humans’ natural desire to measure everything in periods, be it days, weeks or months or years. Which, of course, is also useful for comparative purposes. It probably has some benefit from a psychological aspect, too.
But, on the other hand, markets do not perform so conveniently as to match our human cyclical, periodic desires. A poor performance one week compared with a previous week is not necessarily a reflection on the trader’s own performance, rather it perhaps due to a more erratic or sluggish market environment.
In this light one could argue that if, for example, one has a 4 win/2 loss situation why stop there, if the market is apparently working favourably? And, again, if one unfortunately starts off with 2 losses, then to stop there might result in missing opportunities to recover later.
Personally, I prefer to manage risk and money by applying rules to each trade individually rather than in bulk numbers of trades. And then to select my trades according to the quality of each signal setup regardless of how many or few trades are taken per period.
If one’s trading strategy/method has been selected/developed/tested in order to provide a probability edge over a number of trades then I don’t see any reason to need to stop trading for the rest of a given period just because one hits a level of 5 wins or 2 losses in a pre-defined time period, whether it comes at the start, middle, or end of that period. It is surely the quality of [I]each [/I]trade setup that matters rather than the number of trades?
Having said that, I also tend to behave at times in the same way. For example, if I get to the last few days of a month and I am happy with the results so far then I do reduce the number of trades and risk exposure to protect it - illogical but human, I guess
But it is good that you raise the subject, because this issue is important for every trader to think about and decide which approach works best for them.
I have a couple setups that I use and over a long time have decided the Stop Loss and Take Profit and position size that I am comfortable with and that is what I use all the time.
I keep it pretty simple.
It has never actually occurred to me to count wins and losses in that matter, but it’s certainly a good advice, I think. I should try and test this on a demo account first, at least.
I dont think there is anything wrong with that methodolgy.
My only counter to your 5-2 rule would be that there are trading systems that dont measure success by win/loss ratio. A 35% win rate with a long term positive expectancy is a profitable system.
Im just playing devil’s advocate here but im passionate about trying to convey to newer traders that when your building a system or analyzing the profitability of a current system, dont rely soley on win/lose %.
Perhaps such a pattern will help newcomers to restrain themselves and not be led to the excitement. But in practice, this rule is not very useful. It is necessary to understand that the market is quite dynamic, and there are different situations in which it is impossible to follow specific schemes. For example, take four losses and one victory, according to your logic, I have to exit my live account. Still, at the same time, a good trader will analyze the market and make a couple of successful deals that will close the unsuccessful ones. Your money management rule may work, but it will bring you minimal profit, and your development in trading will be very weak.
I would agree that it is hard to count wins and losses and decide when to pause in between, but certainly there is a point in your post. I think that you should be careful not to overtrade, and few lose deals should be a sign that something should be changed in analysis or trading.
Money management is a big issue in trading. If a trader’s money management is not right, he will get into a lot of trouble in trading. If you do not focus on money management, you will not be able to hold on to your investment. Money management is an important part of trading. I take a 2% risk for each trade of investment. I try to keep my account safe with the aim of money management.
A 2% seems reasonable to me. We have to ascertain our risk taking capacity and must plan our trades according to it only. Managing risk has always proved beneficial for me too.
This is very informative article. many new traders can not make money management strategy properly. It will help them to learn something about money management.
First rule is try to open quality trade. Sometimes we open trade out of fear of missing a trade. If you are a day trader do not open new trade if you hit stop loss. Do not try to open revenge trade. When a stop loss hit, our mind doesn’t work smoothy. So chances are there to make a wrong decision.
Trade with high probability is quality trades. Trades that match all the criteria of your strategy and mind set. Most of the time people force themselves to find a trade, even if the strategy is not supporting the trades but they somehow open trades. Hope you got it.
I like your advice. It is simple, but at the same time very effective) You can immediately see that you use it yourself, and perhaps even improved it. Personally, I think that trading is not possible without risk management, like you do. Everyone has their own advice and habits in this business, and it’s pretty nice that you shared your))
