The Importance of Money Management in Trading
Whether you trade Forex, binary options, or maintain an investment portfolio for trading in the major markets, a solid money management plan is needed. There are several decisions that must be made with regards to all forms of trading, with one of the most important being the total amount of funds that will be committed to each trade. Here, we’ll discuss a few of the ways in which you can go about managing your trading and investment funds in the best possible manner.
The primary areas up for consideration when considering how to manage your funds include:
- Deposit Amounts
- Withdrawal Amounts
- Amount of Funds (Per-Trade)
- Trading Fees (If Applicable)
All traders are advised to have a an option money management plan in place before placing their first trade. This plan does not have to be permanently fixed, however, and will actually need to be adjusted over time as your profits grow and strategies change. With some forms of trading, such as binary options and Forex, you can decide on a fixed amount for each trade. This can certainly be advantageous when it comes to limiting potential loss amounts. Most brokers do have minimums in place, but these tend to be very reasonable. With Forex, traders can often trade in micro lots with only small amounts of funds.
Avoid Emotional Reactions
Emotion will always play a role in trading, but it is best to limit it as much as possible to avoid poor decisions. One way in which to do this is to have a money management plan. The elation of being on a “winning streak” while trading can lead to too much confidence and over-investing. Too many losses can cause a trader to become too conservative, which can then lead to missing out on one or more profit opportunities. It is for this reason that many traders claim that emotions can be your worst enemy. Clearly, having a plan in place and sticking with that plan is going to provide its advantages.
Money Management and Trading Strategies
Per-trade amounts can be paired with specific option trading strategies. One example would be a compounding strategy, where investment amounts increase or decrease along with progress. Another example would be difference in investment amounts along with the success percentage of strategies. Yet another would be the use of trade services, such as Binary Option Robot Software or signals. These services must be well-evaluated prior to making decisions regarding trade amounts.
Deposit / Withdrawal Strategy
Fund management goes beyond just deciding on investment amounts. It also extends into the area of depositing and withdrawing. Even first-time traders realize that it takes money to make money, meaning that you will need a funded account in order to actively trade. While it is always possible to re-deposit, not having a funded account has caused many traders to miss out on prime opportunities to profit. There may also be banking fees to consider. This is not to say that you should not withdraw profits. After all, the goal of trading Forex or binaries is to generate profits. However, there should be a plan in place to ensure the account is always prepared for active trading.
Assess and Adapt
Although having a money management plan in place requires the trader to be disciplined and stick to it, an assessment of its effectiveness is also required. Once you have been following a particular strategy for a certain period of time you should take stock. You should take a look at the drawdown that you may have experienced as well as the profit targets. This should of course all be done in conjunction with an overall analysis of your trading strategy in general.
If you plan on trading, get a money management plan in place. This will serve as protection of your funds and help you to earn more money in the long run. There is no set plan for everyone, as each individual has different goals and expectations for profit growth. In general, slow and steady is the best route for those who are just getting started. Over time, the plan can be adjusted to allow for larger trade sizes and larger withdrawals as profits multiply.
Founder Dinis Guarda
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