Money management in trading is essential to preserve capital, maximize returns, and control risks. Here’s what you need to know:
- 1. RISK PER TRADE
- Position Sizing:Limit each trade’s risk to a small portion of your capital, typically 1-3% of your account balance. Position size is adjusted based on the trade’s risk and the account size to minimize potential losses.
- Stop-Loss Orders:Always set a stop-loss level to protect against significant losses. Calculating an appropriate stop-loss level involves evaluating the asset’s volatility, support/resistance levels, or ATR (Average True Range).
- Risk-to-Reward Ratio:Aiming for a minimum 1:2 or 1:3 risk-to-reward ratio can ensure that profitable trades outweigh the impact of losing trades.
- 2. DIVERSIFICATION
- Asset Selection:Diversify across different assets or sectors to avoid overexposure in any one area, reducing the impact of a single trade going wrong.
- Uncorrelated Trades:Aim to pick assets or positions with low or negative correlation, especially if using leverage, to reduce market-specific risks.
- 3. LEVERAGE MANAGEMENT
- Use Caution with Leverage:Leverage magnifies both potential profits and losses, so it’s important to only use leverage if the risks are well understood. Start with a lower leverage ratio until you have a proven strategy.
- Margin Requirements:Regularly monitor margin requirements to avoid margin calls, which can liquidate positions at a loss.
- 4. CAPITAL ALLOCATION
- Reserve Capital:Never invest all your capital in active positions. Keep some capital as a reserve to add to positions or to cover unexpected moves.
Gradual Scaling:Use scaling techniques (adding incrementally to positions as they go in your favour) to manage exposure, rather than investing the entire amount at once.
Fullerton Markets Research Team
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