Money Management
To develop our money management plan, we’ll look at financial survival from a risk management perspective.
What are the risks as a result of trading?
- Individual Trade Risk – a single trade loss which takes our account to levels which force us to quit.
- Session Draw-down Risk – a single trading session which takes our account to levels which force us to quit.
- Business Draw-down Risk – a sequence of trade losses over a longer time-frame resulting in draw-down to levels which force us to quit.
- Increased Size Risk – an inability to psychologically manage the increased size as our account balance grows, leading to excessive draw-down.
- Insufficient Income Risk – an inability to maintain lifestyle through lack of income, forcing withdrawal of account funds and our inability to continue trading.
These risks are managed through clearly defined controls within our trading plan.
The next article is an example trading plan inclusion. Followed by Explanatory notes article. As always, feel free to adjust as you see fit (recognizing that increased risk increases the likelihood of failure to survive the learning curve).
INFO
- You will note that my recommended levels of risk are VERY conservative.
- The focus in this plan is not on capital growth, but rather on capital preservation during the learning phase.
- As such, we aim to ensure a low percentage risk at all times.
Once consistently profitable, if you wish to increase risk in search of higher gains then by all means increase the percentages, or do some further research on alternate money management strategies.
Do so at your own risk though. The focus (in my opinion) should always be more on capital preservation than on growth.