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Money management

How can you trade in control, relaxed, unemotionally, and with confidence? The simple answer is to develop a consistent money management strategy with a positive outcome. Time and time again, I have heard from winning traders that a mediocre system with good money management triumphs over a superior system with poor money management. Money management is the vital element required for success, yet so few traders concentrate on it.

What's the best money management strategy? I think the beginning trader is looking for the Holy Grail here, but if there is such a thing, I've not found it. Going in, I strive to risk only 5% of available equity on any one trade (striving to be as close to this number as possible, including fees and slippage). However, I know that slippage and extraordinary events could potentially raise that number for any one particular losing trade. If I can keep my loss per trade to approximately 5%, it takes 20 losing trades in a row to wipe me out. Even at 10%, it would take ten losing trades in a row, and I have enough confidence in my system to believe the risk of total ruin under these parameters is small. Of course, I need to stick to these parameters, and this is where conditioning comes into play.


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