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CONSERVATIVE MONEY MANAGEMENT THE ANSWER
What is the most important aspect of trading, and to your success in trading, that is probably the hardest thing to face and understand? Why is so much time spent on trying to decide where to enter a trade and where to exit? Where to place your stops or where to find the correct support and resistance lines? Why is the most important aspect of trading ignored? I would guess it’s because we are not really aware of its importance. Predicting price action is addressed with vigor while this area of trading is woefully disregarded.
So, what is this area of trading that we are lacking knowledge of? Simply……….
TRADE SIZE – or what is known as position sizing -- also known as bet sizing or betting strategy -- is one of the key elements of MONEY MANAGEMENT. Whatever you call it, it's the process of determining how much to trade
Position sizing can be used to increase returns, reduce risk, improve the risk to return ratio, and smooth the equity curve, among other goals. It has to do with what trade size do you start with, when do you increase it and when do you decrease it?
Why is it important? Mainly because it can take a mediocre performing strategy and turn it into a massive profit making machine. Knowing which variation of money management strategy is ideal for you in order to achieve a desired result is absolutely paramount to any kind of serious success in trading.
If you don’t spend the time and energy trying to understand money management and what it can do for you when applied properly to your trading strategy, then you might as well find some other line of work.
There are many different ways to vary the number of contracts when trading. Some of the most commonly used methods are listed below. 1. Fixed size. The same number of contracts is applied to each trade. 2. Fixed dollar amount or equity. A fixed dollar amount of account equity for each contract. Eg: $5000 of account equity per contract. 3. Fixed fractional (risk). The # of contracts is determined so that each trade risks a specified fraction of the account equity. Eg: 2% of account equity is risked on each trade. 4. Fixed ratio. The # of contracts each trade is increased by the “delta” amount of profit earned per contract. Eg: if the delta is $5000 and the current number of contracts is 2, you will need $10,000 profit before increasing the # of contracts to the next level. 5. Generalized ratio. This is a generalized form of fixed ratio that includes an optional parameter to change the rate of increase in the number of contracts with increasing profits.
Margin target. Sets the size of each position so that the chosen % of account equity will be allocated to margin. Eg: if you choose a margin target of 30%, then 30% of the account equity will be allocated to margin.
The most important part of reaching your long-term goals is the money management strategy you use.
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