Money management is an important part of any trading strategy. Many traders feel that money management will hinder their trading, or that they can do without it. But time and time again it has been proven that incorporating money management into trading is the best way to limit risk and to increase returns. But before choosing a money management strategy, there are a few things you must remember.
First of all, money management will have the largest impact on how fast or how slow your account will grow over time. Money management will allow you to control how much growth you see in your account, as well as how quickly you see that growth. This can be hard for some traders who want to see fast growth, and want a large return on their account. Sometimes money management can make your progress more slow than you would like it to be. However, money management will also help you to increase your account size while decreasing your risk, and that is perhaps even more valuable than fast account growth.
Secondly, traders should always use anti-martingale money management techniques. Martingale money management might get you lucky once or twice, but they are not going to be how traders should trade the markets. There are many effective anti-martingale strategies for traders. It may take some time to find the one that works best with your trading, but a good money management strategy is worth the wait.
You should also always trade with enough capital to withstand early drawdowns. You should understand the potential drawdowns that can occur with your trading strategy, and you should make sure you have enough capital to withstand and to trade through any drawdowns in order to see your account grow.
Finally, a trader's psychological makeup and goals should always be taken into consideration. There might be a perfect position size that would give a trader the greatest return on their investment, but if it is not appropriate for the individual trader, there is no point in using it.
It is always important to remember that money management cannot turn a poor strategy into a winning one, and it cannot make an unmotivated trader better, but it can make a good strategy great. If you would like to learn more about the importance of money management, and different approaches to money management, check out Rockwell Trading's money management course, in which we discuss all of these topics and many more.