RISK MANAGEMENT

Machiavelli the infamous Italian renaissance writer is often associated with the term “the end justifies the means”. Risk management can be thought of with the same ethos clearly, you need to manage your means to achieve your goals. The oversight of many new traders is that they put too much emphasis on making money rather than preserving capital and that is one of the core reasons people become another statistic in the failed trader camp. No-where is it more obvious than in trading that you can’t always be right, the market doesn’t lie nor does your P&L so in such situations it is prudent to admit you are wrong and take a manageable loss and never let your losses become catastrophic.

It is like the adage of flipping a coin scenario, people will say that the odds of each flip of the coin is 50/50 so that it is nearly impossible to lose 5 times in a row. Of course, you may be right the first few times but overtime it will happen because the coin itself does not remember or care what side it landed on, therefore common sense and fact tells us each new flip of the coin is a new event. In this sense money management is like the coin flip in that its necessary to focus on the current events and act accordingly.

Good money management is to accept that utilising a realistic and proportionate percentage of your capital is a sensible place to start. Without a system of managing risk and capital when trading you may as well gamble for a living!

The following areas should be considered, and addressed when completing your money management system:

• Target Income – Make it realistic when you start, you can always change it on developing
• Costs – How much does it cost me to be in business?
• Cash Flow – What do I need to keep a reasonable standard of living?
• Risk Management – What is my risk in my trading is it realistic? Will it facilitate profit, and growth?

Once you have set your money management system stick to it, and revise it when necessary dependent on your results, and certainly use it as a regular reference to your performance. It is very easily done in trading that plans are made and easily forgotten once the physical trading begins, after all it is very tempting to do so! But avoid these mistakes now and you will form good habits for the future, and spend less time corrected bad habits, which is a job in itself.