No one win every trades; money management help traders to reduce losses on losing trades. Moreover it also maximizes traders’ gains on winning trades.

All traders have ever heard about how important the money management but the most of them are still losing in understanding money management strategies.

To make traders clear and be able to find strategies of managing money that suit to them. Let us talk about a couple of simple and easy money management rules.

The 2% – 6% rules have been introduced in Dr. Alexander Elder’s book “Come Into My Trading Room”

The 2% rule is to protect traders from any single terrible loss that can damage their accounts. With this rule traders risk only 2% of their capital on any single trades. This is for limiting loss to a small fraction of accounts.

Besides a disastrous loss, a series of losses can also damage traders’ account. The 6% rule is lent to handle this. Traders have to set the maximum of accumulated loss for a month. When they reach that level of loss, they have to stop opening any new position for rest of the month.

These 2 rules are designed to protect traders from the two types of losses. Nevertheless the 2% – 6% would be change for each trader. For those who are able to accept the higher risk, they might adjust the 2% – 6% rules to 5% – 10%, where the 5% is used to protect the account from any single disastrous loss. While the 10% rules is used to protect traders from any series of losses in each month.

A good way to start learning the skills to manage money is getting to know the 3 basic strategies of Money Management.

The 3 basic Money Management Strategies.

1. Constant Investing System

The Constant Investing system need to define a fixed amount of each trade at the beginning. Then traders must open each position with the same amount of money.

The sequence of profit or loss in trading does not matter as the following example.

 
2. Martingale System

The Martingale system is well-known as a betting system. The main idea behind this system is that statistically gamblers cannot lose all the time. Therefore when gamblers lose in a gambling, they should increase the amount of money by 2 times in next gambling to cover their loss in last gambling.

This type of strategies guarantees 100% profit if traders or gamblers have enough amount of money to cover their string of loss. If not, this system will destroy their portfolio.

3. Anti-Martingale System

As its name, the Anti-Martingale System is opposite with the Martingale strategy. While the Martingale will increase the amount of investment when traders get loss (smaller portfolios). The Anti-Martingale System will accept greater risks by increasing amount of trading during periods of expansive growth (larger portfolios).

These are 3 basic types of strategies in Money Management. There are still lots of Money Management Strategies out there. Find the systems that best suit to your trading styles.

• Psychology 50%
• Money Management 30%
• Market Analysis and Trading Systems 20%

Most of traders spend most of their time looking for good trades and only focus in the last factor, Market Analysis and Trading Systems, which is the least influence on successful trading.

Once traders enter a trade, they rely on their emotions to make their trading decisions and miss the essential
element of winning, the management of their emotions. Their lacking of managing themselves leads to poor money management of their trading portfolios.

Without a method of managing your money, even the best trading system or strategy is absolutely worthless.
The 100%-win trading system does not exist, therefore the strict money management  rules will provide a safety net for traders.

That’s why the money management is so important in trading.

The major goals of money management rules are:

• Ensuring survival in markets
• Earning steady rate of return from trading
• Earning high return from trading

Lastly, A most importance rule of managing your trading money is Do not change money management rule while the opened position is not yet closed.

Note : For traders who interested, please visit the Trading Money Management corner in our store.