If you go through all the trading quotes and advice available out there, it’s evidently clear that the majority of them is about dealing with losses. Because when winning is never a guarantee and risk is absolute, protecting your capital and curbing losses is all one can do. One way to do that is by incorporating money management techniques into your trading process.
Position sizing is one of the key tools for money management. As the name suggests, it is the size of the position held by a trader within a particular portfolio. Every time you determine your position size, keep in mind that a single trade could put your whole account at risk and so you should refrain from taking up such trades.
As you dissipate your trading capital over time, it will get harder and harder to take back what you lost. Even to bring back your account to its original equity will be an uphill battle. But with proper money management, you can sensibly allocate the trading funds across the various financial instruments and trades. Thus the risk is diversified rather than limiting it to a single variable.
We have discussed only one money management tool so far (because this article isn’t about that), but there are lots more available such as flat risk, stop-loss, and etc. And finding the one that works for you depends on your trading system, capital, strategy, financial markets, and so on. But no matter what method you adopt, money management will help you to stay in the game. By making certain that in the event of a loss, a trader still has capital set aside to resume trading activities if they wish to do so.
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