One Simple Rule That Will help You Make A Success Of Trading.

Futures’ trading is not about predicting prices. A successful trader will often only make money on less than half of the trades that they place. That’s right; they will lose money more often than they make it. The fact is, though, that the winning trades will make far more than the losing trades lose.

A simple example would be a system that makes money 30% of the time and loses money 70% of the time. The average winning trade is $1,000 and the average losing trade is $200.

Given 10 trades our trader will make a profit of 30%x10 trades x $1,000 = $3,000 and losses of 70% x 10 trades x $200 = $1,400 for an overall gain of $1,600.

This sounds great in theory; however in practice it can be difficult psychologically to follow a system that loses money 7 times out of 10. The professional trader will control this risk with strict money management rules.

The difficulty for the average trader is that they don’t want to manage risk they want to be right. Losing money doesn’t feel good so they will want to try to eliminate this feeling by never taking a loss. Unfortunately, this leads to day trades turning into swing trades turning into position trades and finally long term investments.

All trading systems will have losing trades and no matter how profitable that system is if the money management is not right eventually the system will blow up your account. Put simply, if you have a system that is right 99% of the time and you put 100% of your funds on each trade then eventually that 1 in a 100 losing trade will wipe you out.

Money management is the key to trading success. You must be able to ride the bad losing runs while still maintaining enough funds to take full advantage of the spectacular winning trades that more than compensate.