Money management is not only about where you place your stop in an effort to control your risk, but it also about the size of your position relative to the amount of capital you are trading, along with expectancy. At all times, given the risk you are taking, your account size, and the volatility of the market, you must know the optimal number of contracts to be long or short.
A position sizing model tells you ‘how big’ of a position to take, and can help determine where to place your stop. Improperly placed stops, whether they are fixed price-based stops, or trailing stops, will not only limit your risk, but will also limit your opportunity and thereby seriously degrade your performance.
Expectancy is the average amount you can expect to make (or lose) per dollar at risk. The key to expectancy is not only how you enter the trade, but how you exit it. Accuracy means having the patience to wait for good entries, and execution means having the ability to identify highly profitable opportunities and then take maximum advantage of them. How much and how often you add to a profitable trade, how long you are in the trade, and where you get out of a losing trade , is key to increasing profitability while controlling risk.
Proper money management optimizes the use of your capital. Risking too little doesn't give the market the opportunity to allow your profitable trade to take place and grow, and risking too much will quickly blow up your account. Most traders make the mistake of taking a reactive view of risk, in which their overriding concern is avoiding losses and protecting small profits, in lieu of a more aggressive management of risk which would result in a more efficient use of capital.
A position sizing model tells you ‘how big’ of a position to take, and can help determine where to place your stop. Improperly placed stops, whether they are fixed price-based stops, or trailing stops, will not only limit your risk, but will also limit your opportunity and thereby seriously degrade your performance.
Expectancy is the average amount you can expect to make (or lose) per dollar at risk. The key to expectancy is not only how you enter the trade, but how you exit it. Accuracy means having the patience to wait for good entries, and execution means having the ability to identify highly profitable opportunities and then take maximum advantage of them. How much and how often you add to a profitable trade, how long you are in the trade, and where you get out of a losing trade , is key to increasing profitability while controlling risk.
Proper money management optimizes the use of your capital. Risking too little doesn't give the market the opportunity to allow your profitable trade to take place and grow, and risking too much will quickly blow up your account. Most traders make the mistake of taking a reactive view of risk, in which their overriding concern is avoiding losses and protecting small profits, in lieu of a more aggressive management of risk which would result in a more efficient use of capital.
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