What if there is a solution to keep your account afloat no matter the strategy you are using? Would you follow it to the letter? Well, such strategies already exist, the issue is beginner traders cannot resist not to stray away from it. Ridiculous as it sounds, most traders lose because they start gambling instead of trading, even though they have something that already works. Apply this strategy and it would be very hard to blow an account.
Money Management (“Oh no, that again”)…
You will find many strategies online, ready to be implemented. However, rarely you will find information about how big your trade or position should be. It is a risk management strategy. Yeah, the thing “no one” wants to listen, it is not as cool as some pimped indicator you can plug in. It is the same rule you need to follow when on a diet. You can eat this and this much every day. The desire to eat forbidden food may get the best of you, but if you persist, positive results are unavoidable.
The brain just wants excitement…
Except in trading, you feel the gambling desire. The idea you can double your account tomorrow is very exciting and lucrative. The truth is it may happen, it can happen more than once. The feeling gets you moving. Unfortunately, everything will end badly. Excitement will be replaced with rage or depression. This game has no good ending unless you cash out and never return after a successful account doubling. But again, you will have to stop thinking about doing it once more, the idea of getting rich quickly.
Fundamental, technical, it does not matter…
Fundamental analysis, all the news, and events that you think might get the price of some asset going are answering the question of when and in which direction. Technical analysis does this but more strictly. Money Management answers the how much question. No analysis will help you if the Money Management plan does not exist. Spend so much time developing a good entry and exit strategy, all is for nothing without this boring MM plan. Luckily, once you set it up, it is done, just follow it. Oh, yeah, you have to follow it to the letter.
Your strategy should work…
Finding new ways to trade is great. However, now you know that a strategy needs optimal capital allocation for each trade. If you do not spend much time finding indicators and like to draw support and resistance, Fibonacci, and so on, that strategy is good too. The good news is money management makes any strategy work, essentially it is this thoughtful position sizing that drives your account value up and down. The even better news is that once rounded up, money management does not require you to work on it, just repeat the same for every trade you do.
Easy MM with Ratios…
Ratios are easy to set up. Once you understand the Stop Loss and Take Profit idea, try to go with the generally accepted approach of having at least a 2 to 1 ratio. This just means your TP is two times away from the trade entry price than the SL. Where to place TP and SL is something we have discussed a lot before, but initially, you can take any channel-type indicator that measures volatility. Place TP at the top or bottom of it, depending on which direction you are trading. SL point is easy to place now, just halve the TP distance for a 2 to 1 ratio.
Easy MM with Price Action pivots…
Simply said, pivots are price tops and bottoms you see on the chart. These extremes are used to place support and resistance lines, especially if they are repeatedly appearing at the same price levels. These lines are easy picks for your SL positioning, and if you follow the ratio rule TP is also defined. You can experiment with your ratios, extending them to 3:1 or higher. Now when you know how to protect and capture profits at the basic level, the only thing that remains is how much money to put into every trade.
How much to put into a trade…
Technical traders like indicators and indicators are really good at precisely telling you how much to invest. Volatility indicators usually produce a number to tell how something is volatile. You can try and open fixed-size trades. For example, if you have a $10000 account always open $500 positions. That can be 5% per trade. However, when an asset is really moving, more than others and more at that particular time, that 5% can suddenly become a serious loss, even with a proper SL. Of course, we can simplify things. Currencies or assets that are more volatile, such as the GBP, are not going to follow the same 5% trade saying rule. Simply have it to 2.5%. If you see chart candles that are higher than usual, do the same. Now if we really want to get nerdy and precise as technical traders, we can use volatility indicators to calculate precisely how much to invest. One such indicator is now a standard issue on many trading platforms, the ATR indicator.
Strategy example with Keltner Channel…
The picture below contains two indicators, the mentioned Keltner channel and a simple volatility indicator using the TradingView platform. The strategy uses the Keltner channel to set the SL level, at the bottom for long trades and the top for short. Since the channel can be used for breakouts and reversal trading, and it also shrinks if the volatility is getting lower, we have a universal tool for placing SL and TP. Mix in the ratio rule and the position sizing rule and your Money Management is all set. The green vertical line is our long entry moment. We enter a trade when the price breaks out of the channel AND the volatility indicator is rising, but also we consider if the price has broken previous resistance marked with a red horizontal line. The middle channel line is our SL and TP is twice as far from the market with the green arrow.
As you can see, our TP was hit almost at the top of this small trend. Now, the price action went into consolidation, new support and resistance levels are formed until we notice a new breakout of the Keltner channel. It was a short trade that pierced the support line but failed to make the way to the TP level, we were stopped at the SL. Even though we have 1 win and 1 loss, we are still in the money since the TP to SL ratio was 2 to 1. If we fail again, only then we are at breakeven. Testing your strategy, you will aim to be better than 50%, right? Because 50-50 is just coin-flipping. Even then you will be profitable just because you have a money management plan in place. Now you can do the fun stuff. Find a winning strategy of your own.
Sources of knowledge…
On your way to finding a winning strategy suitable to your lifestyle and psychology is fun, it is like finding parts of a money-making machine. On this very website is a whole library of strategies, concepts, and indicators. Of course, consider tweeter and youtube but also dedicated forums where people share ideas. You will notice that something could blend into your strategy. The best part is you do not have to worry about losing. Even if you are very bad, Money Management will give you many more chances to slowly get it right. It is one universal thing that can be used in many other markets.
