Having a trade system is only one part of being a successful trader. Having a money management system is every bit as important as having a trade system that works. Bennett A. McDowell says,
Money management may very well be the most dramatically important piece of the trading success puzzle.
Money management allows you to close your week or month with a positive balance. This allows for a profit over the long term, even though short term losses may be incurred. But what sort of money management rules should a trader have when it comes to managing his or her portfolio? Here are a few of the more common ones.
Diversification Is Important To Maintaining Equity
Noted Investor, William D. Gann stated that;
Never risk more than 10% of your trading capital in a single trade.
When dealing with a market that can be very fickle at times, it is recommended not to risk more than a certain volume of your equity on a single position. In the case of Gann, the advised risk percentage is ten percent, but this may go up or down depending on how much diversification your portfolio may need. It should be noted, however, that risking more than 20% on a single commodity is considered far too much risk to spread on a single position.
Use Stop Loss Orders
Stop Loss orders are there to ensure that you don’t end up losing the entirety of risked capital on a failed trade. Stop losses allow you to get out before the market turns too sour and eats up your entire invested amount. It is essential to maintaining a semblance of order (and profit) in your portfolio and the stop loss order should be used as often as you trade. Although some traders prefer to trade without a stop loss, the action is risky in the extreme and should only be attempted with extreme caution.
Never Let a Profit Become a Loss
Stop Losses can also be useful in locking in a profit. If a position starts becoming profitable, then it is advisable to move the stop loss upward to lock in the profits. The result is a situation where you can be assured that if the market does turn against you, your stop loss will already be present to ensure that you don’t end up taking a loss instead of a gain. It can be a devastating blow to a trader to see his or her position move from a heavily profitable position to a marginally profitable one to a losing position, all in a matter of a few days.
Trade Along the Trend
Trend Lines are interesting and useful indicators to determine the market state of a commodity. Trading along the trend is recommended because it ensures that you manage to lock in profits as the price of the commodity rises. Declining trends allow you to sit out and wait until you’re satisfied that the price has bottomed out and the commodity price begins to rise again. The essential factor in trading with the trend is spotting when it changes and trading along it.
Commodity trading is an exciting and dangerous business, fraught with cunning and disaster around every bend. It’s not a profession for the timid or the faint-hearted. Commodities have a life of their own. They grow, they expand, and they take on a persona. Just like a person, a market can be temperamental and watching the statistics allows you to chart the changes in this temperament and allows you to profit from it. No trade will ever be 100% profitable to protecting your equity is as important as winning a trade. Over the course of your trading life averaging out with a profit is what you should be aiming for.