Money management can create or break any investment. It does not matter that a trader is skilled or novice. If he fails to manage his money, he may face huge losses and account blow-ups. It deals with managing both leverage and risk. The greatest danger lies in the leverage part.
Even if an investor has an 80% success rate, poor money management on the rest 20% part can wipe out his account. On the other hand, an investor with a 60% success rate can still make a massive profit with robust money management strategies. Proper money management works hand in hand with preparation, discipline, emotional control, and prudence.
Here are the top tips for money management in indices trading.
Don’t average down
There is a difference between the two: First, averaging down on loss (not planned before); Second, scaling into the position inferred before. This tip applies to the former. All levels of investors should know the difference between the two.
Averaging down from a weak position without a plan is typical to blow out the account. In these cases, an investor averages down out of hope and desperation. This problem is two-fold. First, by anyhow, the trade works, providing the profit; in this case, it will set a bad example that the trader should double down in danger. Second, if the investment does not work, the outcome can be huge losses and perhaps a forced liquidation margin call.
Have a Max Dollar Stop-loss
It takes discipline to determine it. Thus the best way to determine the max daily stop loss is to own the trading platform, which provides information on this stop loss. You can choose InvestFW platforms for this. They provide you with all the essential and real-time information related to your trade and market fluctuation. The minimum deposit for the broker is $250. So, start your trading journey with InvestFW. Visit their site for more information.
The max dollar price should range between 2 to 3 times the net daily profits if the investor manages the 80% loss/win ratio. If the accuracy falls, it triggers the max loss to fall. The type of ratios places special attention on the rate of accuracy. It works fine for precision scalpers.
Find trades with a reward ratio or substantial risk.
Measure the potential profit against the stop-loss on a certain trade before removing the trigger on the trade setup. Generally, this is the reward/risk ratio, where the implied loss is compared with the implied profit. The traditional thing is always to have at least a two-to-one ratio of risk to reward (usually, close to three to one or higher). Another factor that makes the most impact on this ratio is the probability.
Avoid trades of higher risk.
Generally, these types of risky traders are done out of desperation to make up for the large incurred losses, and hence they end up badly for the investor. The market has a greater chance of winning these types of risky trades. They understand that these trades are made in desperation and emotions. It’s the apparent human physiology to fight back and trade heavy after losses.
Understanding this will help the trader recognize high-risk trade conditions and avoid them. When an investor faces such sets of losing trades, the best thing to do is to trim down shares or/and leave if the max daily dollar loss level is attained. Remember that it only takes one step for over-leverage trade to head to an account blowout.
Take short breaks
An investor’s psychological stability is crucial for remaining flexible and having the potential to make the right timely reactions and judgments. Trading within the trading day and taking regular short breaks away from the screen can work well.
When one gazes at the computer screen the whole day, the mind stops working in a better direction because the psychological approach to trading depends largely on physical and mental health. One should get up and take about a 20-minute gap to refresh himself in such a case. Taking breaks, especially after a huge win or loss, can help the trader clear his mind and carry the trade to its full potential.
Stick to your corner
The last one in the top 6 money management tips list is to stick to your corner. Every investor has a different trading style with which they are comfortable. The tip is to discover this strategy.
The combination of facets mentioned above is what makes your corner. Once you find your corner, adhere to it and be cautious not to stray. An investor can carry this way for trading until it is no longer a corner or becomes too transparent or saturated.
Bottom line
Hence you learned all the techniques which lead to poor money management and ways to improve your managing skills while trading. If you want to read other such courses and blogs on indices trading as well as risk management.
