Basic Rules5 basic rules for preserving your capital


  • As in any business you have to follow some rules to win, and rules in this game are those of money management.
    In this field many people know that "The difference between a better and a trader is having control of their activities", and to be in control it is essential to have strict rules which must never be transgressed in order not to risk the worst.
    Thanks to these rules, traders are able to ensure their capital safety against possible losses and these rules can be grouped into five main points:

     

    • Maximum single Investment  3%

    The most important rule of money management is about the amount to be invested per trade.
    There is no fixed amount of $ 5, $ 10, $ 50 regarded as an ideal amount for making a trade, but it all depends on cash availability of the trader! That is, every investment must not exceed 2/3% of the account balance. In this way, even if a trader undergoes consecutive losses, his capital is not compromised.

    Example: amount available in the account $ 1,000, a single investment will be $ 30
    Therefore, when a trader starts to increase his balance, since that is tied to a percentage, it will increase the amount to be invested per transaction; the same principle applies in reverse.

    “Why is that the most important rule?”

    The answer is to be searched from the psychological aspects of trading: bad times happen to every trader, and very often, and in these cases if you do not followed the 3% rule capital significantly reduces and the trader works in a "disadvantageous " condition because he feels the weight to recover from losses and that has to be done it with a small amount of money. It is a chain reaction that usually leads a trader to lose all the capital.

     

    • Maximum total investment10%

    The second rule of money management says that if you open multiple positions at the same time the total amount invested should not be more than 10% of the capital. That means a trader could open different positions by investing on each various amounts but investing no more than 10% of your his total balance.

    Example: if the balance of a trader is $ 1,000, the maximum amount he should invest is $ 100 which can be divided between different operations.

    This rule only applies if the different trades are of diverse nature and that refers to different markets, logics or very different expiry times. In fact, if we make three simultaneous investments in the euro area with similar expiry dares, these trades will have the same outcome and the risk is equivalent to the one for a single trade, so this rule is not valid and the 3 summed trades should instead have a maximum of 3% of the total.

     

    • Real money only with Tested strategies

    The third rule of the money management is to test a strategy for success before investing real money.

    In order to test a strategy we should be carry out tests on historical data through the use of software that let you make simulations through automatic back-tests (see the article "testing"), but often that is really difficult if you do not have in-depth expertise, so what you can do is testing it live on the demo accounts.

    Warning! Working in demo may give different results from real as psychological component linked to any loss of real money greatly influences operations and thus their performances.

     

    • Follow a plan of operations

    The operational plan allows you to have control of your trading. Through it you can adjust the limits in which you want to operate and more important avoid "overtrading". The operational plan must set out the following points:

    - daily trading hours and start time and end time
    - maximum number of positions to be opened
    - maximum number of trades in loss that can be undergone
    - number of winning trades goal at which to stop once reached
    - assets, deadlines and exact strategies you want to use

    The trading plan is created to be followed every day and should never be changed during its operation even if you are not producing any positive results.

     

    • Emotional control

    Last rule of money management says that a trader should control his emotions. A trader should remain distant from the results of his trading and in particular:

    - never making decisions after getting losses or winnings
    - do not make hasty decisions, and study the results on a monthly basis before making important decisions.
    - always be calm and efficient, if not avoid trading
    - stop and take a break if you have reached a situation of nervousness
    - do not try to recover losses, ignoring your operating plan
    - do not work by martingale, IE do not open positions by doubling the amount from the previous trade in order to recover a loss

Leave a Reply