By Taro Hideyoshi
Trader tend to believe that they do not need to address money management until they can prove that a particular trading system will work and they can make money using it. This is the most common areas for serious mistakes by traders and it is a costly mistake.
As I have always mentioned that a sound money management is a component of a complete trading system. So, do not wait to manage your trading money until you can prove that a trading system makes money. Although you can gain profits from the system without managing your trading money but, who know, you might gain much more profits with a proper money management.
Of course, if the trading system is a bad one, even the best way of managing money cannot turn it to be a good one.
It is about expectation (as I explained it in earlier articles). You have to make sure that your trading system must has positive expectation. It means that you know the system, over enough time, will generate a positive result. Since, no money management scheme can mathematically turn a negative expectation into a positive gain.
By saying this, it does mean that you do not need to manage your money properly in trading until you can prove that your trading strategy has a positive expectation. There is little additional risk in applying money management from the beginning instead of not applying it at all.
If you are actually risking your money in market, you most likely to do so with a trading strategy that has a positive expectation and start managing your money from the beginning based on your expected performance. The only reason that traders should not manage their trading money from the beginning is the traders actually expects to lose if that is the case, why trade?
An area of common confusion when money management is concerned is whether particular methods of managing money work on currency trading, or whether they work with futures contract, options, stocks or whatever the market. The answer for the questions is it does not matter whether the market is, managing money is based on one thing only, it is account performance.
Another common question, related to the topic, is whether the money management methods can be used on a particular trading style or trading system. The answer is the same as the answer about the market and for the same reason.
About the Author
Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.
If you would like to find more articles on MetaStock Tutorials, MetaStock Formulas, Trading Systems and Money Management. Please go to MetaStock Trading System.
You would also find the list of recommended books for trading & investing at The Investing Books.