The Key to Success: Money Management

In trading a lot of people will tell you that trade management, along with mastering emotions are the most important factors to success. While I agree they are very important to success…they are entirely MEANINGLESS without proper, solid money management. Sadly, this is where far too many traders destroy their trading hopes and dreams…namely in the form of blown accounts which leads to quitting.

Let’s be honest, the vast majority of traders lose when they begin this career path, yet over-time some become immensely successful and others fall to the way side and give up. How can this be? If most folks lose in the beginning, why do some people achieve such high levels of success while others fail? MONEY MANAGEMENT. You have to understand that the market doesn’t care about you or me, or anyone for that matter. The market just is. It’s neither fair nor unfair. It’s neither good nor bad. It’s neither this nor that. It just is.

On the one hand this is the greatest meritocracy there is, no advantage to anyone, no nepotism, no advantage to the rich or poor, no advantage to the smart or dumb, no advantage to the young or old; a truly level playing field. How perfect. Please understand that I’m not saying the market is a 100% level playing field, however for our purposes as individual traders, it is. Why? Because generally speaking the average day-trader or retail trader has access to the same information; thus making our opportunity for success relatively equal.

So, why then do some do so well while others struggle? There are a multitude of answers to that, but the one that is most important, especially in the beginning of a trading career, is money management. Far too many traders allow their ego to take over their trading, thus risking too much too soon, and ultimately losing far more than they should, especially given their level of experience. The problem with many traders is that by the time they appreciate and understand the business, they have run out of money. How is this possible? Usually it’s down to EGO. They feel like they have to raise risk to pay the bills, or perhaps they’ve been trading for several years now and they have to raise risk to satisfy their ego. “I couldn’t possibly tell my family friends that I am a breakeven trader after 1-2 years of doing this. In my old job I used to make $250k a year. How will they react knowing I haven’t made a dime in trading yet? I need to prove to them that I was RIGHT when I left my old job and decided to become a trader.” Sound familiar, or sound like some variation of how you’ve felt from time to time? Don’t become this type of trader.

What effect does this have on our psyche? It makes us feel frustrated and inadequate, and this ‘offends’ our ego, and then our need to prove we are right comes out in the form of raising risk or doubling down on losing positions. Essentially ‘the idiot’ (we all have one) takes over which leads to poor decision making in the form of poor money management, which leads to eventual failure.

If this sounds like you, then you need to re-evaluate your money management approach, and also re-evaluate your timeline for success. The shorter you make it, the more stress you will be under, thus the more likely you will make poor money management decisions and struggle to succeed.

Every trader needs to make specific rules about how much money they are ‘allowed’ to lose before quitting for the day, the week, the month and so on…It is also important to have ‘account’ based rules as well. For example, if your trading account loses 10% of its value, then immediately stop trading and seek professional guidance. This business is NOT a game, and things can spiral out of control very quickly, so please don’t take this topic lightly. If so, you could end up as an EX-trader in a very short amount of time.

Successful trading begins and ends with proper money management. Some of the smartest people in the history of the world have been brought down by ego, greed and the inability to properly manage risk. If this sounds like you, let this be your wake-up call! Ignore proper money management and you will likely be doing something else for a living real soon! Best of Luck and Happy Trading. Jared and Anmol and the Team!

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