When one enters the world of financial trading, they face a barrage of information, making it hard to know where to begin.
A lot of sites offer advice that is not always accurate or complete. This article aims to present reliable trading techniques based on facts and figures rather than opinions or speculation.
While no strategy is foolproof, joining the group of experienced traders is bound to increase your chances of success. If you are ready, let’s start with some profitable money management techniques!
Use stop-loss orders
This should be self-explanatory for most traders, but many newcomers cannot correctly use this simple yet effective tool. The purpose of a stop order, also known as “stop-loss” or “stop-market”, is to limit your losses on a losing trade.
It is done by entering a market order whose price is lower than the stock’s current market price (long position) or higher (short position).
Cover your losses quickly
If you use stop-loss orders, you will not lose more than the amount you want. However, even if your stop-loss orders are executed properly, it may take some time for prices to move in such a direction that the stop order becomes active and triggers an order to sell/buy at the preset price level.
During this period, which could be several minutes or longer depending on volatility and volume of trading activity, the market may move against you and cause significant losses. So you should never keep your stop-loss order at the preset position for too long. Instead, raise it every time the price goes up by a certain percentage (e.g.,5%).
Sometimes it may be preferable to place your stop loss of or below recent swings of high volatility instead of using the initial value if prices are not showing signs of reversal following their breakout or breakdown levels.
Increase risk when you can
Suppose you plan on staying in business for longer than just one week. In that case, there’s no point in risking 1% of your trading capital on each trade with an average profit target, which is roughly equivalent to potential losses under normal market conditions. It makes more sense to take some profits off the table that can act as capital buffers for later positions. It could be wise to increase position size when you feel confident about your ability to handle more significant peaks and troughs in prices.
Trade during trending periods
They drive the financial markets by trends that last several hours or days before reversing themselves. If you look at any short term (5 minutes, 1 hour, etc.)
Chart of the futures market.
The first thing that strikes you is its peculiar trajectory, which resembles roller coaster curves rather than smooth straight lines.
Knowing this trend provides invaluable information for money management because it tells you precisely where to enter and exit trades for maximum efficiency (i.e., maximizing returns while minimizing transaction costs).
The faster the market is moving, the easier it becomes to make money. You can explore more charts here.
Follow your trading rules
This may appear too obvious to mention, but if you look back at some reasons amateur traders lose their deposits so quickly, you notice that one of them is their habit of disregarding trading rules under pressure from emotions such as greed and fear.
Trading is all about having clear goals, making educated guesses on future price movements according to information, and following the trade only when the setup is in your favour.
If something doesn’t feel right or you can foresee potential obstacles down the road, just walk away instead of taking hasty decisions that could ruin your results for months or even years to come!
Once again, many traders cannot achieve consistent success because they don’t follow their trading rules, either deliberately or accidentally.
This is the most crucial money management rule of them all!
Close your position instead of hoping for more gains
Remember that it’s always easier to keep what you already have than to take it from someone else.
So if you’re losing and don’t see any sign of acceleration, just accept that your position is going nowhere and close it by executing a market order.
The price may never come back again, but the loss will hurt much less than what could happen if you keep holding onto it for days or weeks and your capital buffer!