As a trader, you need to acknowledge that every trade you enter is not going to be a winning trade – you will have both wins and losses. It is of vital importance to have a set of rules in place so that when you have losing trades, all your profits or indeed all of your float is not eroded. This is what money management strategies are all about. Trading is about protecting the capital you have.

Trading is not about the wins to losses ratio, it’s about having a number of small losses, and when you win, you win big. In other words, it’s about cutting your losses short and letting your profits run. It’s not about how often you win, but how much your win. If your system had an 80% chance of winning $100 and a 20% chance of losing $1000, in the end, you are bound to lose everything. On the flip side a couple of $1000 wins is far better for your wallet than eight $100 losses. Learning to roll with the small losses as part of an overall strategy is what traders need to learn to do.

Risk management is really the only thing you have control over when you trade. You don’t have control over the trend, how long it will continue. The market will do what it is going to do, regardless of your hopes and plans.

To be successful in trading, you need clearly defined money management strategies and these rules need to be carefully documented. There are four components to setting trading risk management rules. The first is to consider your trading float. Determine how much money you are going to set aside to trade with. This decision needs to be based on your overall trading goals and all of the other financial commitments you have. The more you trade with, the more you stand to win or lose.

The second thing to consider is your maximum loss. Decide on the amount you are prepared to lose in one trade. This amount could be anything from 0.25% to 2% of your capital. Choosing a percentage that you are comfortable with will make it easier to accept any losses you may have and still allow you to keep trading.

Initial stops need to be set and then adhered to. Set a point at which you accept you have made a loss and then exit the trade. There are many ways to set an initial stop, such as using indicators and percentages. The important thing is to have something in place so that you won’t be tempted to let a loss keep on running in the hope that the trend will turn in your favour.

You need to determine your position size. How much are you going to buy of the instrument you are going to trade? Calculate your position size so you never risk more than your predefined maximum loss if your stop loss is hit.

Give due consideration to these four components and then write down your money management strategies. This will immediately place you in the top 5% of traders. Remember that money management is the most important aspect of your trading system. You will only become successful once you have a strict set of rules in place and a firm commitment to abide by them.