wisdom: money management
to trade succesfully in the long run, you have to do anything possible to preserve capital and avoid the risk of ruin.
the way to do this is to manage your money, so that you limit the negative effects of any losses.
the best way to do this is by having strict rules to determine how much money you will risk for each trade.
a common rule is known as the "2% rule" which basically says that any single trade will not put at risk any more than 2% of your total capital. SO if your capital is $100,000, you will not lose more than $2000.
personally I use a variant of this rule. I only risk 2% for longterm trades, 1.5% for medium and short term, and 0.5% for daytrades.
some people believe that in a long term trade you risk losing more than in a short term trade, but the reality is that short term trading is riskier.
the way to do this is to manage your money, so that you limit the negative effects of any losses.
the best way to do this is by having strict rules to determine how much money you will risk for each trade.
a common rule is known as the "2% rule" which basically says that any single trade will not put at risk any more than 2% of your total capital. SO if your capital is $100,000, you will not lose more than $2000.
personally I use a variant of this rule. I only risk 2% for longterm trades, 1.5% for medium and short term, and 0.5% for daytrades.
some people believe that in a long term trade you risk losing more than in a short term trade, but the reality is that short term trading is riskier.
posted at: 10:10 pm
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