Improve your trading with Money Management
The term money management refers to the way you manage the money you have set aside for a particular purpose. In this case, it is trading. What is important is that you make a concrete plan when you start trading and you can draw on these points when you start this work:
Set goals!
How will you achieve the objectives?
What is important to achieve the objectives?
What assets do you have to use?
How should you make the best use of your assets?
These are some examples of appropriate questions you should ask yourself to improve your trading. For example, if you set a budget of 50,000 SEK to trade with, what happens if you enter a period of losses and lose everything? You will be completely out of the market and will not be able to recover your losses.
It is very important to realize that everyone who trades in financial instruments has periods where they make losses and this is when it is determined who can continue trading despite having a bad period.
Capital set aside for trading should be money that you can do without and it should be money that you do not use for anything other than “speculating”. If you are trading a system, it is important to study what the maximum drawdown of the system has been historically in order to know how big positions you should take to cope with downturns.
The risk/reward ratio should correspond to the probability that you will make a profit or a loss. loss-making business. Let’s assume that you make a profit on 50 percent of your trades and a loss on the other 50 percent. If you then lose as much on a losing trade as you earn on a winning trade, in the long run you will be left with the same amount you started with. Instead, if you change your trading so that 70% are winning trades and 30% are losing trades where the winning trades generate less profit than the losing trades, you don’t need to earn as much on each trade to still make a profit. Let’s assume that for every winning trade you make a profit of 50 pips and for every losing trade you lose 80 pips.
We then get the following calculation:
(0,7 * 50) – (0,3 *80) = 35 – 24 = 11
This means that for every trade you make, you earn an average of 11 pips. But this does not mean that you earn 11 pips on every trade, but this is an average over a large number of trades. The idea of this system is that you will take many “small wins” so that you can afford to take some bigger losses.
Another aspect that is incredibly important is that it can be difficult (if not impossible) to make correct decisions in your trading if you are trading with money that you cannot afford to lose. Imagine a situation where you know that if the next deal goes wrong, you won’t have the capital to pay your bills. It is probably quite difficult not to be psychologically affected by situations like this. The risk of making a wrong decision under such premises is clearly imminent.
Set clear goals and rules for when you should enter a deal and when you should leave it. This should of course be tested against how the system works. Let’s say you have a system that generates 99% profit. If you then bet everything every time, sooner or later you will lose everything. It might work for a while but statistically speaking, one time out of a hundred you will be wrong and since you bet everything you own every time, you will lose everything. In other words, you should adjust the risk-return ratio according to how the system generates signals.
The advantage of trading according to a system is that you can more clearly visualize when you should enter and exit a position, making it easier to realize loss trades. The system becomes a helping hand that can be an important support when it comes to making tough decisions. Here’s a clear message for you!
An example of how things can go without a proper strategy:
A trader takes a position worth 10,000 SEK and the position then starts to fall to 8,000 SEK. The trader then thinks that the loss will probably turn up again in the near future. He thinks he can “afford” to risk another €2,000 to have the chance to make a good profit.
When you find yourself in a loss-making situation, most people don’t take the sure loss but take the chance of profit by risking even bigger losses, which often leads to.
The position continues down and the value is now down to 6000 SEK. Now he has a substantial loss. At this point, he believes that the position should not go down any more and must have reached its bottom. On this basis, he chooses to risk another €2,000. Now the goal is usually not to make a profit but to win back the loss and recover the stake.
What happens next is that the position decreases further in value and is now worth €4,000. The trader can’t give up now that he’s been at it for so long, he thinks. The bottom should be reached and the risk should now be minimal, he believes. Now he doesn’t dare to sell, because what if it turns around after he sells? He remains in his position, which will soon be worth only SEK 1 000.
The only way out of such a trap is to let go of the deal. It is much easier to let go immediately while the loss is still relatively small. Once the loss has grown large, it becomes much more difficult to realize the loss and exit the position.
Self-control
In this section, we will address perhaps the most important part of trading, namely self-control. Discipline, responsibility, maturity and mastery are of great importance and traders who think that it is enough to be able to read a few charts and then plunge into trades will get a very unpleasant surprise…
You will be forced to realize things about yourself that you may not want to admit. Trading will show your bad habits. Take the time to think about what we cover in the following sections, and you will gain a lot when you start trading.
Successful trading can be divided into the following parts: 60% self-control and 40% risk control. Risk control, in turn, consists of 20 percentage points of market analysis and 20 percentage points of capital management. As you can see, only 20% is analysis, yet this is what most traders spend the most effort on and avoid self-checking. For you to succeed in trading, you need to start prioritizing self-control.
How well you perform when trading can be easily measured by your performance, profits and losses. There is no escaping your results. Your result can be either profit, zero or loss.
Your self-control reflects 60% of your performance. If you enter the market without being mentally prepared, your chances of success are drastically reduced. Even if you manage to make a profit without being mentally prepared, you might have made an even bigger profit if you had spent more time on the mental aspects and thought about how to act in different possible situations before entering the trade.
Anything that affects your performance will also affect your trading. You will probably have a cold some day, etc. If you usually break even and you catch a cold one day, thus lowering your performance, you might make a loss instead.
Even if you usually make profits, external factors may start to affect your performance and you may start generating losses instead. Such factors that affect your performance may be that you have other things on your mind. You may have a lot of other, non-trading related, things to do.
It is important to be able to focus 100% on what you are going to do, so make sure you get everything else done before you start shopping. By starting the day by analyzing yourself, you can spot these factors before it’s too late and take appropriate action such as trading smaller volumes or maybe even not trading at all.
Analytical methods
There are two main branches of analysis in financial trading. These are Technical Analysis (TA) and Fundamental Analysis. We will go through these two very superficially in this section.
What is Technical Analysis?
Technical analysis involves identifying the likely trend, direction, size and speed of the market. You will study how the price has behaved historically and use this to make an assessment of how the market should develop in the future. TA seeks only an assessment of how a market will behave, with historical price data as a background. You analyze what will happen, not why.
What is Fundamental Analysis?
Fundamental analysis (FA) means that you make an assessment of the facts that are available and based on this analyze how this will reasonably affect the price.
Both market analysis methods try to predict the future direction of the price but they try to solve the same problem in different ways. The fundamental study consists of what causes the movement, while the technical part studies the effect. Those who deal with technical analysis consider that the effect is all he/she needs to know, the reason why a certain thing happens is immaterial. Those who trade using fundamental analysis always want to know why.
Much of the content of technical analysis and other market studies has to do with psychology. Market patterns that have been identified and categorized over the last century recreate particular images in the charts. These images reveal the positive or negative psychology of the market. As these patterns have worked well in the past, it is assumed that they will work well in the future. They are based on studies of human psychology, which tend to be constantly repeated. The key to predicting the future lies in studying historical data. You could also say that the future is a repetition of history.
From a trader’s point of view (on a short-term perspective), the goal of a technical analysis is to find instruments with a potential to have a large movement in any direction, which is necessary to generate profit. TA can also reveal a good level to enter a deal which means that you find the best time to buy or sell by predicting the price direction and upcoming price levels.
To get a better overall picture of the market, you should use both methods in combination. A technical analysis does not take into account upcoming reports and other unpredictable external events. The reverse is true for fundamental analysis, which does not take into account charts and the market psychology aspect.
About the Vikingen
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