Money Management - The Secret Road Map to Successful Trading
During my 16 years trading career, I have found out that more important than a trading strategy, is the money management. So many beginner traders are focusing on trading strategies that are giving them a high wining rate, without drawdowns, which is nearly impossible on long term from my experience. Because, then Warren Buffet will not have years with 50% drawdowns.
Another thing that is missing from perspective of a beginner trader, is to have a plan for each outcome of the individual trades. You will find here 2 road maps for money management, which represent the exact trading plan that you need to follow in order to be profitable long term. I am using the example number 1 for my manual trading, on a scalping strategy, and example number 2, which is a little bit more aggressive, on an automated trading robot. Both have been proven successful for my trading career.
Also, this road map should be applicable to any trading strategy, that will give you at least 40% winning rate, but please test before.
This might seem a little bit complicated or confusing, so please ask me if something is not clear.
Example 1 – To summarize the picture, I am targeting an average of 3RR to every session. But what is most important, is that not every day is a good day, because markets volatility is different every day, so I will be happy with any positive results. Also, it is very important to accept drawdowns, from a string of losing trades, and then say stop for the trading session.
Example 2- I have attached another picture of this road map. As I said before, I am using this to my automated EA, and it is an aggressive money management. This is a little bit dangerous for manual trading, because it can make the trader unable to control overtrading.
Basically, the main reason of this money management, is to provide the trading session with only 2 outcomes.
Outcome 1, a positive result of 5RR which requires only 3 wining trades and one losing trade. This should be possible with many trading strategies.
Outcome 2, negative results of -3,5RR. This means that you should accept bad days, and then the edge will come on having more winning sessions ( not just trades) than losing ones.
Because trading is not only about trades results, but also session or daily results, or weekly, or monthly, depending your trading style. And so, if you have in a week, in the worst case scenario, 2 wining days and 3 loosing, that means you will be on profit 3RR.
Off course this can be modified or adapted to each individual strategy or personality, so I strongly recommend back testing it.
Don't Stumble Trading. Trade Safe!
Another thing that is missing from perspective of a beginner trader, is to have a plan for each outcome of the individual trades. You will find here 2 road maps for money management, which represent the exact trading plan that you need to follow in order to be profitable long term. I am using the example number 1 for my manual trading, on a scalping strategy, and example number 2, which is a little bit more aggressive, on an automated trading robot. Both have been proven successful for my trading career.
Also, this road map should be applicable to any trading strategy, that will give you at least 40% winning rate, but please test before.
This might seem a little bit complicated or confusing, so please ask me if something is not clear.
Example 1 – To summarize the picture, I am targeting an average of 3RR to every session. But what is most important, is that not every day is a good day, because markets volatility is different every day, so I will be happy with any positive results. Also, it is very important to accept drawdowns, from a string of losing trades, and then say stop for the trading session.
Example 2- I have attached another picture of this road map. As I said before, I am using this to my automated EA, and it is an aggressive money management. This is a little bit dangerous for manual trading, because it can make the trader unable to control overtrading.
Basically, the main reason of this money management, is to provide the trading session with only 2 outcomes.
Outcome 1, a positive result of 5RR which requires only 3 wining trades and one losing trade. This should be possible with many trading strategies.
Outcome 2, negative results of -3,5RR. This means that you should accept bad days, and then the edge will come on having more winning sessions ( not just trades) than losing ones.
Because trading is not only about trades results, but also session or daily results, or weekly, or monthly, depending your trading style. And so, if you have in a week, in the worst case scenario, 2 wining days and 3 loosing, that means you will be on profit 3RR.
Off course this can be modified or adapted to each individual strategy or personality, so I strongly recommend back testing it.
Don't Stumble Trading. Trade Safe!
Comment:
Example 2 - Risk to Reward. Here you aim for 3 possible outcomes.
A - WIN WIN WIN = 3 consecutive wins - STOP TRADING 6RR
B - WIN WIN LOSE = any 2 wins out of 3 trades regardless the sequence - STOP TRADING as long as you get 3RR
C - LOSE LOSE LOSE - 3 consecutive losing trades - STOP TRADING anytime negative - 3RR is reached
A - WIN WIN WIN = 3 consecutive wins - STOP TRADING 6RR
B - WIN WIN LOSE = any 2 wins out of 3 trades regardless the sequence - STOP TRADING as long as you get 3RR
C - LOSE LOSE LOSE - 3 consecutive losing trades - STOP TRADING anytime negative - 3RR is reached
Example 1 - Risk To Reward 2
A - WIN WIN WIN = 3 wins out of 3 trades - STOP TRADING 6 RR
B - WIN WIN LOSE = 2 wins out of 3 trades - STOP TRADING 3 RR
C - WIN LOSE WIN = 2 wins out of 3 trades - STOP TRADING 3 RR
D - WIN LOSE LOSE = 1 win out of 3 trades - STOP TRADING 0 RR
E - LOSE WIN WIN = 2 win out of 3 trades - STOP TRADING 3 RR
F - LOSE WIN LOSE = 1 win out of 3 trades - STOP TRADING 0 RR
G - LOSE LOSE WIN = 1 win out of 3 trades - STOP TRADING 0 RR
H - LOSE LOSE LOSE = 3 lose out of 3 trades - STOP TRADING negative 3RR