One of the most difficult aspects of trading is money management. However, it is necessary that traders understand the need how to handle the cash reserve and the amount that can be used to fund his trades. Both novice and seasoned investors should remember the reason why they have taken up trading: to make profits. The same goes for eToro money concerns especially for traders who have no solid experience and are worried about the safety of their funds. Note: If you really want to know if your money is safe with eToro, you can find more details at Wikitoro.org.
As for the term “money management”, it involves determining how much of a risk an investor is willing to take, and when to knowingly exit a trade. The goal is to keep traders afloat and survive for another trading day.
An example of money management trading is selecting a specific amount that you are willing to risk in one trading session. For example, you are allotting $500 for all your trades for the whole month. Then you assign a percentage of that amount, say 10%, for you to use at any given point. This would mean that at any one time you can only spend 10% of $500 on one trade. For your first attempt, you invest $50 and it was a good trade and you earned back the $50 plus profits. Even if your balance is now growing, you stick to the $50 per trade; you do not invest any amount larger than that just to recoup your losses. And you do so until you have summoned up the courage to stop while you are still on a roll, or if you are suffering from a string of losses.
It may require discipline and commitment, but it also ensures that losses are easily absorbed and that goals to make a sizeable profit are realized, albeit with a steady increase in every trade.
How Can a “Money Management” Strategy Work for You?
Risk assessment takes up a part of this strategy where risks should be managed effectively. Riskier trades would present a much bigger payout causing traders to overlook some monetary pitfalls. A solid strategy includes purchasing a high-risk contract but, maneuvering around it in such a way that a trader successfully ends up with high returns from his investment amount.
The point of Money Management Strategy is to minimize losses, while at the same time maximizing profit potential by lengthening a trade run with a string of successful investments. As quickly as profits can be made in trading, unmanaged risks could also lead to losses adding up quickly as well. It is meant to be used by all traders who want an effective tool that guards against going over their investment limit.
What Type of Traders Will Make the Most from ‘Money Management’?
This is especially useful for active traders. A strongly placed management strategy should reduce the need to deposit additional funds as it can be sourced from winning trades.
If you are not the gambling type, this strategy will work for you. Trading forex and other assets is not a guessing game where there is no basis for every trade action. Trading signals and analysis of market data will prepare you to partake in an active role during the trading, and even if there are risky fluctuations and changes in market conditions may be rapid, you should be able to walk away with more profits in your hands than the amount you originally had.
Basic Trading Tips
It is possible to use a variety of money management styles and when combined, may give traders immense benefits in terms of profits. Keep track of your performance to check how the strategy is helping you, and that mistakes, if any, may be corrected. Consider these critical factors in good money management:
- Expect Losses. It’s always good to set expectations. Not every attempt in trading will be a winning one. Don’t let losses discourage you from trading. And if you notice that you are having a downturn, pause, and reassess what you could have been doing wrong. Mistakes are learning opportunities. Eventually, you will get the hang of it and trade confidently and successfully.
- Earn slow but with steady profits. Gradually raise the amount you set aside for your trades. And you can make adjustments to the percentage of your total capital, too. With careful practice, you should be able to build your own planning techniques in gradually increasing your investments.
- Heed changes in the financial market. Be cautious of current market conditions to minimize, if not prevent in its entire entirety, losses. The media is a good source of information that can guide you in your investment ventures. Market movements drive the overall sentiment of traders into approaching the economy in either bullish or bearish trends, which may have significant effects on asset classes.