Inexperienced traders frequently forget a very important topic when they build their first trading plan. Yes, we are talking about the “money management” chapter.
We don’t blame them, because sometimes they even clearly know the difference between management or “technical management” and the referred “money management” concept.
When we refer to “technical management” we are talking about the set of technical rules and technical routines with the specific objective to manage an existing open position. When we refer to “money management” we are talking about the set of rules and policies related to preserve capital and profits during a larger period of time.
Money management is always referred to a larger period of time, for example, the current trading session, the current trading morning, or the current trading week period.
The technical management is referred to an specific trade and only to this unique trade, it doesn’t matter which trading time frame we are talking about, minutes or seconds or days or weeks. I manage that trade and only this. Once we close it for example, another trade could be taken and another technical management will be executed for this new open position.
But we need to know how to manage the first trade profit or loss, and the same situation after taking a second trade in order to protect my today’s profit and my existing capital.
For example, if I have two or three winning trades in a row, we have to previously know how to manage those profits. Do I need to stop my trading because I got three winners in a row? Or I will stop my today’s trading depending on how big my today’s total profit was?
What about 2-3 losing trades in a row? The same question must be answered.
You need to define and rigorously write you “ money management” chapter.
TradingTotal created a whole money management module as a part of our automated trading systems and those money management rules are a good start for your “ money management” chapter as a part of your “master trading plan”.
