Trading money management is fundamental if you are to achieve your goal of financial freedom. The first step you will take in setting your trade money management rules is to define your trading float, in other words, the amount of capital that you have to trade with.
In fact, one of the most commonly asked questions I get is, 'How much do I need to actually start? To help you answer that question you need to first define your objectives.
Here's 5 key objectives that you should follow to get your trading on track.
1) How much time do you have to spend trading? That might be full time, part time or hardly any time.
2) How much capital do you have to work with? Remember, you shouldn't trade money you're not comfortable losing.
3) How much risk are you comfortable with? As we all know, markets move. There'll be times when you have a drawdown. The question then becomes: how much of a drawdown are you comfortable with? 20%? 30%? You need to decide.
4) What annual rate of return do you want? This includes what you expect to make and in what time frame. Be realistic about this. Decide what you honestly think will be returned based on what you're willing to risk. For example, you're not going to have a system that will return 100% per year if you're only prepared to risk a drawdown of 5%.
5) How do you want to take your money from the market? Are you looking for cash flow (consistently taking profits out of the market) or capital growth (looking to grow your capital in the market over time, using the magic of compounding)?
All these decisions need to be based on your income objectives. Are you in it to make a steady income or are you looking at long-term growth?
And remember, there is no set pay cheque in trading. It's not a reliable income. You will have good months, even great months, but then a lull. So don't quit your day job just yet!
So many new traders set themselves unrealistic expectations. Different variations of the question "I want to make 200% a year - that isn't unreasonable is it?" are perennially fired my way. Now consider this.
