Is your trading account hurting? Are you feeling overwhelmed, frustrated and ready to throw in the towel when it comes to trading”? Well, today’s lesson, if properly understood and implemented, can potentially give you the knowledge you need to literally save and rebuild your trading account.

You’ve probably heard that about 90 to 95% of people who trade or “speculate” in the markets with money fail in the long run. While there can be a variety of reasons for this mass failure, the main reason underlying all the others is usually poor or lack of risk management skills. Often, traders don’t even know how important and effective risk management is.

Do not start a ‘war” that you are not prepared to win.

There are essentially three main aspects to trading success: technical skills, i.e. reading charts, price action trading or whatever trading strategy you choose (I use and teach price action strategies for a variety of reasons, of course), money management, i.e. “capital preservation” and includes things like how much $ you risk per trade, position size, stop loss placement and profit targets. And then there is the mental side or trading psychology, and all three of these things, the technical, the money management, and the mental side, are so interconnected and intertwined that if one is missing, the other two basically mean nothing.

Today, of course, we are going to focus on money management, and frankly, if you ask me, I’d say that money management is the most important of the three areas mentioned above. And why? Quite simply, if you do not focus enough on money management and do not take care of it properly, your mindset will be all wrong, and whatever technical chart reading ability you have will be basically useless if the money and mind parts are not there.

Never leave the castle unprotected!

What good is it if a whole army rides off to war and leaves the castle with all its riches (gold, silver, civilians) unprotected and unguarded? For this reason, there is always a defense. Even in today’s military, there is always a “national guard” on guard in case a country tries to attack. The truth is that the people ALWAYS have defended what is most important to them, so why not defend your money!

Why being a “good trader” is not enough

Excessive use of leverage, also known as taking “stupid risks” or stupidly big risks, is the main cause of trading account busting and failures. It’s also why even the best traders can go bust and lose all their money or that of their clients. You may have even heard of some hedge funds going bust in recent years due to excessive leverage and, in some cases, fraud.

In his popular blog, “The Naked Dollar”, author Scott C. Johnston how many prominent hedge fund managers have blown hundreds of millions of dollars just by not properly protecting capital. It really only takes one overconfident or “overconfident” trader to convince himself and others that he is “sure” of something, and then take an overleveraged position that leads to disaster.

Why I am passionate about risk management!

Contrary to popular belief among the masses of traders, risk management is very, very interesting and exciting. And why? Simple. Because it is it’s what makes you money in the markets.

However, most traders gloss over risk management as “something I’ll do later” or some other ridiculous rationale. But in reality, it should be the first and most important thing they focus on. Often traders do this because they simply do not know that power is proper money management, so let us talk about it:

Why risk management is so powerful and how to use it:

What is the key to consistently making money in the markets over time so that you can actually make a living trading? Quite simply, stay in the market long enough to play to your advantage. However, most traders blow out their accounts long before this can happen because they mismanage their capital. I hope you will learn to improve this situation for yourself.

How to make money as a trader:-

Keep all your losses below a certain dollar amount that you set in advance as your personal 1R risk amount that you ok can lose on a given trade.
Trade your edge correctly and let it play out over time so that you have some bigger winners between your smaller losers.
Honestly, that about sums it up. But most traders overcomplicate the whole thing and shoot themselves in the foot over and over again until they run out of money.
In the following illustration, I want you to see what’s going on, understand it, and then use Implement it immediately in your trading.

What the graphs below show is this:

The win rate is not that important. In the example below, the win rate is about 20% and the trader still made money! How? By managing his risk capital properly. Do you see that all the losses are equal, but some of the winners are 4R or 6R? This is what a successful trading performance looks like. It is also ok to have some 2R winners.

You must be mentally obsessed with capital preservation. You have a maximum risk amount of 1R in dollars, and then you have to decide how much money you want to risk on each trade with that maximum amount of 1R or less, but you never go beyond that. In the figure below you can see that the 1R maximum was $100 per trade.

Yes, there were more losses than profits, and by quite a bit, but because the capital management/preservation so was consistent and disciplined, the winners more than made up for the losers!

Conclusion

Most traders devote too much attention and time to the wrong aspects of trading. Yes, trading strategies, trade entries, and technical analysis are important, and you need to know what you are doing, have a trading plan, and know what your edge is in order to make money. But these things alone are simply not enough. You need the right “fuel” to make money in the markets.