Money management doesn’t seem to be the first thing on people’s mind when they start trading. It doesn’t look as sexy and exciting as doubling your money, or going on a winning streak of trades. But as more experienced traders know – it’s a crucial part of making profits and coming out on top.
How Мuch to Deposit?
It actually should come before any sort of trading or analysis. It starts with your deposit which is the first amount you’re willing to lose. And this is the first piece of advice we have – trade with sums that you can afford to lose. What that amount is depends on your personal lifestyle and situation but one defining feature is that it won’t change your everyday spending even if you lose all of it.
This acts as the first mental barrier for traders (it’s actually the same for beginners and the old dogs). It puts a healthy amount of caution into your decision making. Not fear – caution.
It gives you some time to gather experience about trading. Whether it’s the most basic of actions like how and when to open/close trades, setting stop losses and take profits, interpreting indicators like Elliott Wave or something else.
Position Sizing
After you make a deposit the next step is to divide it into equal parts that you’ll use for your positions. Opinions vary on how much every one of these parts should be. The more conservative traders say that each part should be 1% of your deposited amount. The more aggressive ones go up to 5% and even 10% (never ever all-in).
Our choice varies from 1% to 2% which gives you 100 or 50 trades to make. With that number you can make an analysis of your own performance regularly and make adjustments accordingly. It creates room for experiments and for looking at the bigger picture, not to mention protecting from a bad run of losses.
Diversification
Pro traders, hedge funds and banks diversify in a similar manner and they could drop to percentages even lower than one. The instruments, companies and timeframes they invest in require different sums to provide a healthy return and that’s why they constantly look not only for the best trade but also for money management and as a consequence – risk management.
Everyone decides how much they invest in each position and deposit but don’t let FOMO control your trading! The markets are a high-risk endeavor whether you trade forex, Apple, Crude Oil or Bitcoin – the mechanisms are generally the same (although some of these are quite more volatile than others). Make sure you can absorb losses and diversify your positions!
