A lot of newbie traders have not enough money when they first start trading and all of them have at least heard about the money management. A part of them understand that the money management is important, but they think that it doesn’t concern them. Some traders don’t put enough money in their trading accounts because they don’t want to risk more than a certain amount. Other traders may understand that all the building parts of the trading are important, but still can’t manage to follow all the trading rules. They say that they will grow the trading account and then they will follow all the trading rules.
I’ll grow my trading account and then I’ll follow all the trading rules
I used to think this way because I was afraid of losing the money I worked hard for. I was thinking that it would be easier for me to risk the money made by trading.
It happened to me in the first year of my trading career, when I believed everything that I was reading in the trading books. I found two trading methods in a book I was reading, one of them was a news trading method. I believed that this method was very good and I even believed that risking 10% of the trading account was a good money management for that system. So I said that would build the trading account, using that method, and later I would use the other method for trading and making money. After a couple of consecutive loses I was down 40% of my account. I didn’t have the confidence to continue trading that method. I learned the lesson; I learned that I should never trust the method just because it’s described in a book. I learned that I should test a method before starting to trade real money. I also understood that I should risk less per trade. But I continued to search for holy grails that would give me only winning trades.
Buying a lot of cheap goods
When we are in a shop we may easily buy different things that don’t cost much. We may not need all that goods, but just because they don’t cost much we buy them. So we end up buying a lot of things because when we think about the single piece it doesn’t affect our budget so much, but if we sum all the amounts we realize that we’ve spent a lot.
The same thing happens when trading. Let’s assume that our profit target is $100, but we see only $50 potential profit we think that this time we will take only $50, because we are afraid to take a loss and we prefer a sure profit instead. This may be fine if it’s our last trade in our trading career, because as we don’t know where the price will go we can decide to take profits. It may also be fine if we do it once, because $50 will not make the difference. But if we continue to do it systematically we can discover that this is the cause of our failure as traders. You can read more about this in the article Exiting a trade is as important as entering it.
Preserving the trading capital
Successful traders suggest first to concentrate on preserving the trading capital while gaining experience and then to concentrate on making money. I agree with them. But this affirmation shouldn’t be misinterpreted.
This year it happened to me again to want to grow the trading account, before starting trading it with more trading methods. This time I tested the strategy, but when I was in a trade I closed it prematurely. My profit target was $100 but as soon as I was seeing $50-60 of profit I closed the trade. I was saying that I was doing this for growing the account size. How can we preserve capital, while gaining experience? Personally I was using this excuse to exit the trades prematurely.
This time I remained profitable, but my profit would be bigger if I closed the trades at the targets and not led by emotion.
Giving up an addiction
I think you’ve heard a lot of times phrases like. “This is my last cigarette”, “Today I’m eating the cake, but I’ll start a diet tomorrow” and of course “I’ll build my account and then I will follow my trading rules”. It’s time to start growing your trading account. You can do it only by following your trading plan. If you don’t follow it, why do you have one?
To preserve capital, don’t enter the trade if it doesn’t meet your criteria or if you are not sure about the chart formation. But once filled, follow trade management rules, don’t close it prematurely and don’t give it more room.
If you realize that you are not able to follow your rules on a series of trades, try to change them. Test how the method behaves with the trade managing rules that you are able to follow. If you are happy with the result you may trade that way. Otherwise, if you will see that not following the rules leads to losing money, you will be motivated to start following your trade management rules.
Define the rules for growing your trading account and use the rules that are compatible with it. Try scalping instead of trailing stop. This way you can have minor drawdowns. You have to test the trading system and see what works best for you based on the money you have in your trading account.