The Secret to Successful the Trading

Everyone wants to know the secret on how to do anything. What is the secret to success? In most pursuits it would be persistence and perseverance. And that is certainly true with trading the markets. Being persistent in your trading and persevering through the tough times will eventually lead you to trading success. But you're here to learn the real secret to successful trading. What's the secret? Is it the trading system? Is it the type of market? Forex, stocks, bonds, options, commodities, futures or mutual funds? Do you have the next hot tip? No, the real secret to long term trading success is in money management.

Keys to Trading Success

Yes you need to be persistent. Yes you need to persevere when the times are tough. Even persevere through the successful times, when emotions start to tempt you to gamble with your latest takings. Yes you need a trading plan, and a trading system. All of these are keys to success in trading any market whether it be in the foreign exchange currency markets (forex), commodities, stocks or bonds. But the real secret to trading longevity and long term success is in money management.

Finding Trading Success in Money Management

Your trading success lies in money management. How much have you got in as buffer? How much have you got in play? (Am I starting to sound like a professional gambler?) Key terms in money management are stop loss and drawdown. A stop loss is a point you choose where to exit a losing trade. Drawdown is the maximum amount your trading float will drop at any time. Money management is all about managing your total capital, the amount you are currently trading and the amount sitting on the sidelines – the buffer amount. Using money management you will be able to control the amount of drawdown you will have from any trade. And doing so will give you confidence to continue trading instead of dealing with the emotional shockwave of very large losses. This is because you have defined and accepted the maximum risk you can absorb.

Why do I need to Mange my Money to Succeed in Trading?

Sometimes we need to rationalize why we do things. I mean, implementing a money management system sounds like a bit of extra work – and sometimes you don’t like the sound of it. But let me tell you, that if you don’t do this, the school of hard knocks will teach you this valuable lesson that I’m giving to you for free.

Why do you need to manage your money to succeed in trading? Its only mathematical. We’ll take a dramatic and over-simplified case study: Lets say we have capital of $100. We can decide to trade and risk all of it. If we lost all the money in one trade – we have no more capital to trade with. If we put in place a small amount of money management: We decide to trade 10% of our capital. Having $10 in play and $90 as buffer. We are only risking a $10 loss on this particular trade. If we only trade with $10 with each potential trade out system is indicating a trade then we have 9 other attempts to profit from the trade instead of the one chance when we had all our money on the one trade. Although the profit is much smaller in proportion our longer term goal is long term success in the markets – not just an overnight one-hit wonder.

How do I make a Money Management Plan?

There are a multitude of ways to formulate a money management plan. But in my opinion, the numbers involved depends on your overall trading goals, capital and whether or not you can accept a lot of risk. Whether you are an aggressive trader or a passive trader your drawdowns, stop loss, buffer amounts and trading amounts will vary. In other words, its up to you to make a decision – but once you make a decision, test it and resist the temptation to break your own rules.

For example, you have $4,000 to trade. Many authors say you should only trade with 2 to 4 percent of you total capital. Even 4 percent is pushing the limit they say. That means you can only trade $80 to $160 of your capital. Which isn’t practical with most markets: you won’t be touching commodities or stocks. What you may play with is options, derivatives like CFDs and forex because they are leveraged. Your drawdown and buffer would be different from someone who has $100,000 capital.

Trade safely with a money management system. Your trading longevity depends on it.