Money Management Can Make You a Profitable Trader

Back in the early 1980’s, back when I used to be a gambler (until 1984), I would often take trips to Las Vegas to play the Blackjack tables.

My connection to Blackjack started before I was old enough to bet at a casino. My step-father was a (compulsive) gambler who would take me to horse races and also teach me the finer points of playing Blackjack.

As a young man, I was able to recognize that horse racing was a fools game. It wasn’t so much due to my step-father consistently losing his stake, but that I could not see how anyone could get an edge betting on horses.

However, when it came to Blackjack, I could see that with a little bit of understanding of probability and good money management, it was possible to make money even though the odds were stacked in favor of the house (casino).

So once I was old enough to legally gamble in Las Vegas, I would find a $1 table and be planted there until the next morning. Once my marathon playing (all night) was over, I would then have enough money to enjoy the rest of my time in Las Vegas. In other words, I regularly had my Las Vegas weekends paid for from my Blackjack winnings.

Was I card counting? Not at all. In fact I have no clue as to how that works. The reason I was a consistent winner as a Blackjack player was that I would employ money management and simply play the probability of the dealer busting.

There are several things I would look for in determining whether to take another card or not. This meant that I had to have some skill at figuring out the ‘probability’ of busting my hand or the dealer busting his. By doing this, I could be assured of some winning hands. Knowing that I’m going to win “some” hands, all that was needed was employing proper money management in order to end up in the green by the time I left the table.

There were other things I would try with some success. For example, once in awhile I would stand and watch the gambling at the roulette table. Here was another foolish game for anyone serious about making money. Yet it had one thing going for it. There was a place where you can simply bet on red or black. It was like flipping a coin.

Now what I would do is to just wait for a series of blacks or reds to win. I would note how often there were streaks of red or black and how long those streaks were. If it seemed like on occasion there was a streak of 6 or 7 straight reds or blacks, I would then start to bet the opposite color because the ‘probability’ at that point would increase dramatically that the streak had to end soon. If the streak continued, I would just double up on each consecutive bet because the odds favor that it would have to end before I lost too much money. Needless to say that I also started with a small amount in order to withstand the draw-down.

While I did get some positive results from games that featured odds like flipping a coin that allowed me to employ probability and money management, the best results came from a game where I actually had some control of the odds along with money management.

Trading is leaps and bounds above gambling when it comes to probability and risk. Trading is not gambling because it does not create risk out of thin air like casino games. Trading risk is already there because it is part of doing business, the buying and selling of goods, much like bartering. The smarter you are about making deals, the better your odds of success will be.

Trading requires that you examine the market carefully to determine whether the asset is being priced too low or too high and then acting accordingly to make a profit. This is much like buying a house in an auction that you believe has enough room to sell at a higher price for a profit. If you are right, you win. If you are wrong, you lose. And the amount you win or lose will depend on your timing and the amount you risked.

Money Management is extremely important when it comes to being successful at trading. With good money management, you can afford to be off on your estimate and still be successful in the long-run. You can make some bad decisions and yet the decisions you make that are good can make up for it and much more. It all comes down to how you manage your risk and your money.

Having a good market timing approach such as the FDates method of trading allows us to increase our probability of successful trades. However, there will be losses with any method. Therefore, good risk and money management is essential if you want to walk away from the table at the end with profits.

With Money Management, you need to first determine the amount of money you have available for trading. Then you need to recognize that there will be draw-downs from time to time. You must treat trading as a business, where there will be expenses. The amount of capital you have for trading will determine the time-frame and the vehicle you can trade.

For example, if you start with a small amount of capital for trading, you have to consider trading costs that would incur from frequent trading such as with day-trading, as opposed to less costs for position trading. On the other hand, position trading would require bigger risk exposure per trade as opposed to day-trading from minute charts.

The other thing you must consider is the amount of your capital that you are willing to risk per trade. This should be a percentage, and absolutely no more than 10% but preferably much less than that, around 1-3% being better.

If your account is small, 1-3% or even 10% may not allow you to trade in certain markets. This would then mean that you either save up more capital first before trading or you find a trading activity that would allow you to trade your small account following the money management risk percentages suggested. This might mean looking at trading Options or trading the Forex where mini-sized positions can be taken.

By having the discipline to stick to risking no more than some small percentage per trade, you can afford to have a string of losses and still come out profitable in the end.

Strictly following a money management plan will require a strict use of the stop-loss. Never, ever put on a position without a stop-loss. Be sure that stop-loss will get you out of your trade within the allowable risk amount per trade. Never change your stop-loss to allow greater risk or losses. Be sure to never let a profit turn into a loss, getting your stop-loss to break-even when profit has reached at least 1.5 to 2 times initial risk.

If you spend some time learning about Money Management and have the discipline to apply it, you can be profitable trading any market with virtually any system, although the better the system the better your results.

Leave a Reply

Your email address will not be published.