In my previous article, I have said that many novice traders when starting their journey in the financial markets, primarily focus on profits and allow their rational to be affected by emotions and lack of discipline.
More often than not, the biggest problem you will face will be your emotions. But how does one combat this? Well, to that I would say analysis and cold hard mathematics.
Figures and statistics do not have emotions, you may have heard of the saying; ‘it is nothing personal, it is just business’. And it could not be truer, by taking time to undergo some fundamental analysis of yourself and your own financial situation, you will be much more well informed and able to evaluate all factors without delusions.
Advantages of money management
- Helps to evade substantial losses
- Increases the number of opportunities to invest
- Eradicates emotional trading
Disadvantages of money management
- The decrease in potential profits
- Slow and steady approach, not as engaging
- Slow capital accumulation
Frankly speaking, this evaluation is simply a way of observing how much capital you can afford to invest without any problems, which is an extremely significant factor to comprehend when trading. By taking the time to assess this, you will find it easy to alleviate your emotions.
For instance, it is much easier to come to terms with a loss of money, if you have accepted the reality that you may lose. However, if you have been trading with money you cannot afford to lose, you may find it problematic to not try and successfully trade it back, which can lead to irrational decision making and lead to further financial decline. So be a vigilante.
You may need to change your trading perspective from trading offensively to trading defensively. What do I mean by that?
Well, think about how you got the money in the first place, the hours you worked, the effort you put in. You should want to protect it. Many professional traders do not play aggressively, simply put, they carry out an extensive and comprehensive analysis, assess their appetite to risk, and then invest accordingly. As a result, you will be able to trade with less stress.
If you have not carried out your financial assessment and devised a discipline to follow, or strategy to stick to, you may find yourself trading larger amounts and decreasing your opportunities. Simply put, when you assess you can afford to invest say $1000 this month, you may think twice about trading $100 on a single trade. This in turn would limit your trading opportunities to 10 trades. Though, a vigilante trader will diversify the amounts, taking into consideration their fundamental analysis, their technical analysis. Meaning they may trade only $10 each trade, which would give them 100 opportunities to trades.
Key points to consider
- How much can I afford to put at stake in order to invest?
- Employ diverse and adaptive analysis when considering what amounts I allocate per trade
- Stick to your analysis and assessment of both yourself and the markets, do not let emotions come into play.
