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
Your Committed Trading Partner