Money Management Trading Skills

There are a lot of skills involved in trading shares and other securities. Money management trading skills are more important than knowing which stocks to pick and knowing the best time to exit your trade. Money management is also known as risk management, it’s all about preserving your capital and your risk appetite. Many people focus on looking at charts and creating systems in picking stocks and exiting stocks but ignore the important risk dimension to their trading. When putting together a trading system, it is also important to include parameters such as your trading size with respect to the amount of capital you have. A strict money management regime is an essential trading skill for all successful traders.

We have discussed risk a few times on this site. There is a 2 percent rule which is talked about in many trading books of which I’ve written three articles in the past:

• Two Percent Risk Management
• Two Percent Trading Mechanics
• Two Percent or Die

A trader with awesome money management skills can have a string of 20 losses – which can be quite devastating to any trader, emotionally and on their trading account, but still recover from the loss with a couple of great trades. Having no solid money management plan will usually lead a trader to failure – you must always know how much you and your trading system can afford to lose. Usually the general rule of thumb is 2 percent. They say: “Limit your risk on any single trade to a maximum of two percent of your trading capital.”

The aim of the game is to preserve capital. Once your pile of cash is gone – you can’t trade anymore. End of game. You want to stay in the game for longer. Your money management plan should outline parameters like how much capital to risk per trade, when to risk more (or less), how much to risk at any one time (you don’t want to be ever ‘all in’), position size calculations with respect to your capital and how (and when) to expand your current share holdings via pyramiding. It is also wise to implement loss limits per day/week/month to give yourself some breathing space and time to collect your thoughts without jumping into panic mode and start trading to get yourself out of a hole. The consistent traders tend to have a low tolerance to risk and never get themselves in a devastating loss situation.