According to Van Tharp, the biggest secret to success that people fail to concentrate on is money management. Position Sizing is the key to masterful trading and investing and refers to “how much” with respect to any position in the market. Money Management, or position sizing, deals with questions such as how many units of your investment should you put on at a given time? How much risk should you be willing to take? The question of “how much” determines your risk and your profit potential. Equalizing your exposure over various trades gives each one a greater opportunity of making profits. Few traders understand the need for money management, but we will show you how understanding money management can help you and how it is extremely important to successful trading.

“Risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half.” — Bruce Kovner

“Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical.” — Larry Hite

“You have to minimize your losses and try to preserve capital for those very few instances where you can make a lot in a very short period of time. What you can’t afford to do is throw away your capital on suboptimal trades.” — Richard Dennis

Psychological reasons such as greed, not understanding the odds, or the desire to fail commonly result in excess risks that lead to losing money. Hundreds of thousands of people open small accounts every year and end up losing all their money because of poor money management. Their mathematical odds of failure are extremely high simply because their account is too small. The purpose of money management is to tell you how many units you are going to put on, given the size of your account. An example of a money management decision is deciding that you don’t have enough money to put on any position because the risk is too big.

Regardless of what you’re trading, money management strategies will give you the biggest edge. Although you cannot control the market itself, you can control your money and your risk that you make on each and every trade. William O’Neal, founder of Investors Business Daily, said that the whole secret to winning in the stock market is to loose the least amount of money when you’re not right.

O’Neal believes that your money management strategy answers these questions:

• How much money should I risk on this trade?
• How many shares should I buy?

Your number one goal as a trader should be to preserve your capital so that you can stay in the business long enough to cover your losses and make a profit. Some traders follow the 2% rule in that they don’t risk more than 2% of their capital on a single trade. Your first thought should be how much money you can lose if you are wrong, not how much you can earn if you are right. Discipline and Patience are keys to success as a trader.

Defining your maximum loss is an excellent money management strategy to live by. Maximum loss is the amount of money that you would be okay with losing in a single trade. This strategy is important when it comes to keeping your losses small. The main reason for failure in trading is risking too much money and ignoring money management strategies. If you stick to your money management strategies, keep your losses to a minimum, as well as taking profits according to a proven system’s rules, you will almost always be guaranteed success in the business of trading.

The experts from Turtle Trader have formed these three statements:

Money management is a defensive concept. It keeps you in the game to play another day. For example, money management tells you whether you have enough new money to trade additional positions. Don’t confuse money management with stop placement. Stop placement does not address the how much question.

Money management is risk management. Risk management is the difference between success and failure in trading. Trading correctly is 90% money and portfolio management, a fact that most people want to avoid or don’t understand. Once you have the money management down though, your discipline and psychology is 100% of your success.

Money management optimizes capital usage. Few have the ability to view their portfolios as a whole. Even fewer traders and investors make the move from a defensive or reactive view of risk, in which they measure risk to avoid losses, to an offensive or proactive posture in which risks are actively managed for a more efficient use of capital. Trend Following risk management formulas and philosophies are key to increasing profits while controlling risk.

Position sizing is the most important part of money management and is also an easy concept to grasp. The most important thing to remember is not to put more than you can mentally and financially afford to loose on a single trade! Remember that the primary goal in trading is to preserve your capital and to minimize your losses so as to mentally and financially live to see another trading day.

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