One of the things that hurt me quite a bit early in my trading career was not to have a good money management plan. I used to randomly change the position sizing depending upon how good I felt about a trade, or to scale up by compounding after a series of winners. The result was that I was a net loser over a period of time. The intent was to scale up my account quickly but the result was quite the opposite a gradual depletion. It was a frustrating experience particularly because I was having more winners, more winning days, but the losers were big mostly on the trades with increased position size! I didn’t even know what the problem was as I wasn’t journaling my trades, and only blaming the markets or those unknown and unseen forces out there waiting to take my hard earned money as soon as I played a bigger bet. During those days I tried a number of live trading rooms, where I could follow an ‘expert’ just copying the trades recommended in the room. Again my behaviour was to take larger positions in safety of ‘experts’ opinion. The safety came from placing the responsibility of the trade on the ‘expert’. Well results were no different as even the experts get losing trades; I was losing more as I was taking larger positions. A lot of emotional turmoil and drawdowns brought home some key learnings:
- Take responsibility of your trades – whether you follow a strategy you learned in a trading book, seminar for formal training, or you follow an analysts view or use a trading room or indicators’, ultimately you have to take complete accountability for your trade. If you place the blame on a book, a seminar, an analyst or whatever else you were following, you are not likely to succeed.
- Good money management is a critical factor to success. Different traders taking exact series of trades may produce different results depending upon what money management rules they apply. Work out a rule that suits your account and emotional personality and keeps you in business for long term.
I personally use a fix percentage of my invested capital as the risk per trade. I do not change the fixed amount risk after every winner or loser but wait till substantial cumulative gains to reconsider changing the risk size. When you are ready to increase your position size, remember you will experience a different level of emotions trading with increased size – every up or down tick moving P/L by a bigger amount than you were used to before – so don’t underestimate the impact of those emotions.
In our training programme we place a lot of emphasis on these factors and work with our students to create their own money management plans based on realistic objectives.