Money Management
Money management is concerned with the number of contracts you trade given your starting equity. It attempts to optimally utilise your capital to maximise your profits while preserving your account.
Losses versus gains
When you make a 10% loss, you need to make more than a 10% gain on your remaining capital to make up that loss and get back to your starting capital amount. This is best demonstrated using an example. If your starting capital is $10000 and you make a loss of $1000 (or 10%), your balance is down to $9000. In order to regain your starting amount of $10000, you need to make $1000 profit from a $9000 balance, i.e. a profit of 11%.
Now if you make a 50% loss, i.e. $5000 (following on from the above example), you need to make a 100% profit on your reduced balance in order to get back to your original starting capital of $10000. This demonstrates how important it is to have a money management strategy in place.
Money management strategies
There are many different money management strategies. You may create one that suits your particular system or use one of the more common methods described below:
Fixed Percentage of Capital
A very popular management tool is to use only a fixed percentage of your capital to trade with. In most cases, traders never commit more than 2% of their capital to any one trade.
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