How To Find Out If Your Money Management Plan Is Working

By: Leroy Rushing
One of the most overlooked topics in trading, Money Management has the power to make or break you as a trader. It would be fair to say that you could be the best trader on the planet, but if your money management strategies are deficient, you will probably go broke very quickly. Money Management is an essential element of trading discipline that is practiced by all professional traders.

So what is Money Management? Money Management is essential to preserve your trading capital and is simply a set of rules that governs how much money you have at risk. Ask yourself the following questions to determine whether or not your Money Management plan is in good working order:

1.Do you know how much you are risking on each trade? This depends, to some extent, on the time period over which you trade. A good rule of thumb for day traders is to risk a maximum of 2% of your trading capital on each trade.

Remember, you will not win every time and you need to be able to withstand a losing run and stay in the game. Not staking too much on one trade is one of the secrets you must learn if you are to master the art of day trading.

2.Are you over exposed in a particular sector? If you have too many trades running the same way in the same sector, it can be the same as risking too much of your capital on one trade. If you need convincing, just look at how often the share prices of companies in the same sector move in unison.

3.How much of your capital is exposed to the market at any given time? Your Money Management system will tell you how many trades in total you should have running at any given time. You might think you have a good mix of buys and sells and have a good spread across sectors, but a very volatile market can very easily whipsaw you out of all your open positions. This is particularly the case for day traders using tight stop losses. Don’t have your whole trading capital committed to the market at one time.

Good Money Management is an elemental component of trading. It is not something you can learn overnight but a steady progression that, if done properly, can truly lead to life changing results. Develop sound Money Management habit, and you will be amazed at the results you can achieve. There is no reason to go for the "big one" with every trade. Slow and steady - with small, consistent profits - will bring you results beyond your expectations.

For more information on Money Management techniques, as well as other proven strategies to improve your trading results, click on the links below.

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