Tuesday, June 25, 2013

What Aspects are Involved in Money Management?

1)Knowing well in advance how many positions you will have at one time at a maximum.
2)Knowing which style you are going to use for each trade
3)Based upon the style knowing your actual EXPECTATIONS of gains (a close estimate works)
4)Also Knowing your win probability for that particular method
5)Calculating the amount to risk according to the method, and according to your current risk tolerance determining what percentage of that "suggested amount" to actually risk
6)Identifying the setup using the method that provides a good low risk high reward entry in the first place
7)Identifying the actual numbers of risk and reward.
 8)Knowing when and by how much to deviate or at least take some profits and all profits as well as cut some risk or all risk
9)Knowing YOURSELF***
10)IF you know yourself to have troubles not taking on a trade as it comes to you putting safeguards in place to prevent yourself from trading just for the rush.
11)Having a strict regiment if necessary to go through a routine or checklist that ensures you don't violate any of YOUR own agreed upon strategies, thereby keeping integrity with yourself.
12)Experience to actually show to yourself hat you are capable of managing money and making trades and building and growing account first by putting in the hours in paper/demo trading (thinkorswim on demand is great for that).

There are many more things. Another big one is knowing what is "correlation", and what it has to do with trading. What is risk/reward and how it impacts your returns AND your win rate? What is win rate vs win ratio? How does risking more or less change how your overall bankroll is built over time? What is drawdown and what does it have to do with trading and how to determine what your % of a 20% drawdown is over 100 trades based upon your odds and more?

This journal may not get to all of this, but it will try to go over everything eventually. The actual individual setups also help. Knowing what certain things relate and knowing certain strategies... everything is important.

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