Money management is as simple as this, imagine playing a coin toss: on the one side you lose, on the other you win. You risk $10 per play, and risk $1.

Even with less capital, there is not much fear - because it takes 100 consecutive losses to get out of the game. We can play long time, unless two exchanges charge per transaction (commission).

Managing capital in trading aims to survive

The first goal in capital management is to ensure survival first. In trading, you need to avoid the risks that get you out of trading. The second goal is to earn slowly, the third goal is to increase profits - but it has to be viable first.

Losers often put their entire capital into one trade. They continue to trade the same volume or more. Most losers try to get out of the hole they've dug. Good financial management helps you avoid that pit in the first place.

The deeper you sink, the harder it will be for you to get out. If you lose 10%, you need 11% to get back to the original level, but if you lose 20% you need 25% to get back to the original level. And if you lose up to 40%, you need to make up to 67% back. And with a loss of 50% you need to 100% to get back the same as the original.

Get rich slowly by trading through capital management

Newcomers to trading often try to get rich quick. They may win in the short term, but in the long run they will return the market all by taking big risks.

A person who makes 25% annual profits can become the king of Wall Street. A trader who doubles their capital in a year is considered a star in the field. If you make 30% profit a year, people will definitely bring money to you to manage (make comparisons with saving at a bank to get interest, especially in the current economic context). now on).

How much risk?

Most traders are killed by one of two bullets: carelessness and emotion. When a trader overcomes carelessness and achieves a certain level of success, as his confidence grows, he will raise his head out of the trenches - and the second bullet appears. Confidence makes him more greedy, he starts to increase his risk in a trade, and the continuous losses will put him out of the fight.

A professional does not allow to lose a small percentage of their capital in a single trade.

Tests show that the biggest risk a trader can accept to lose on a trade is 2% of their capital. This limit includes both commission and slippage fees. If you have a $2000 account, you shouldn't risk more than $40 per trade.

Most amateurs shake their heads when they hear this. A lot of them have small capital and the 2% rule shatters their get-rich-quick dreams. Most professionals think 2% is too high. They do not allow themselves to risk more than 1% up to 1.5% of their capital per trade.

The 2% rule helps you avoid the huge losses the market can inflict on your account. Even a streak of 5 or 6 losses in a row won't knock you out of the market.

Every time you review a trade signal, check the stop loss, if that stop loss is more than 2% of your capital - ignore that trade signal, wait for a less risky entry. Waiting may reduce your excitement but the potential for profits will be greater.