Things to Consider in Setting Money Management Rules – Part 1: DRAW DOWN

One important part of money management/position sizing is the ability of a trader/investor to avoid large draw downs or limit the draw downs to a certain percentage of the trading capital/portfolio. If the traders/investors always take high risk in their trades, they are more likely to experience disastrous drawdown. Therefore, the way to avoid it is by limiting the size of what you are prepared to lose / risk in any single trade to a certain percentage...

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The IMPORTANCE of Money Management / Position Sizing

The main reason why money management / position sizing is extremely important is capital preservation ….. to avoid the risk of ruin from a losing streak. So long as you have the money / capital to trade, you would still have a chance to recover your losses. However, if your capital is gone, you would have no chance at all to recover, as you have no more money for trading. You may have a high probability trading system that gives you 70% probability of winning. But without sound money management system, you might still get wiped out of the game...

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Money Management or Position Sizing – Part 2: OBJECTIVES

Basically, there are two main objectives of Money Management or Position Sizing: 1) Preserve Capital Preserving your capital should be the first and the most important objective of Money Management / Position Sizing for a trader. In order to be able to trade, you’ll need capital. As long as you have the money / capital to trade, you would still have a chance to make a recovery from your losses. However, if your capital is gone, you would have no chance at all to recover, as you have no more money for trading. In order to be successful in trading,...

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Money Management or Position Sizing – Part 1: WHAT IS IT?

As frequently mentioned earlier, Money Management is one of are the most important aspects of a trading system, along with positive expectancy and self management (trading psychology), which many professionals even believe that these aspects are the “holy grails” of trading. While Money Management is extremely crucial, it is important to note that having a trading system that gives you a positive expectancy should be in the top priority when you...

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Money Management / Position Sizing

Money Management is a very important component in trading. In his book, Come Into My Trading Room, Alexander Elder emphasized the importance of Money Management to be successful in trading: Every winner needs three essential components of trading: a sound individual psychology, a logical trading system and a good money management. These essentials are three legs of a stool – remove one and the stool will fall together with the person who sits on it. Losers try to build a stool with only one leg, or two at the most. They usually focus exclusively...

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