If you take three traders with the exact same abilities and trading talent and pit them against each other, on average only one of the traders will survive.
It doesn’t matter if a guy is playing poker with his mates or they are trading together at a coffee shop, the last-man standing will ALWAYS be the guy who managed his bank roll properly!
This post is going to show you how to not only be the “last man standing”, but to be a disciplined winner and hopefully come away with a larger bank roll than you started with.
Today, we are going to talk about the capital management “secrets” that will give you the edge over any other trader in the room or your mates at the poker table, so pack your cigars, because if you manage your capital properly you might just walk away a winner next week
The best offense is a good defense
As a trader, if you really want to have a chance at long-term success, you need to learn VERY quickly that your mental energy must be focused on the trading variables that you CAN control.
Obviously, we cannot control the market or make it do what we want (although certainly some traders act as if they can), but we can genuinely control most other aspects of trading like:
1. Trade entries
2. Capital preservation and money management
3. Our exits…these are all things we DO have control over.
The KEY point there is capital preservation and money management – properly controlling the amount of money you risk per trade (your leverage and exposure to the market) is the primary thing that will make or break you as a trader , in fact , it will decide the fate of your entire trading career.
Any professional trader knows that capital preservation is the most important part of their day to day routine as a market professional, this can also be called “playing defense” in the market.
Great traders and fund managers think about how much they could lose before thinking about how much they can win.
This is essentially the OPPOSITE of a gambler’s mentality.
Gamblers suffer from an uncontrollable mental sickness whereby they focus almost entirely on how much money they could win with almost no regard for losses, this is borderline psychopathic behavior.
Unfortunately, this behavior is also very common for many beginning and struggling traders.
Capital preservation IS exciting…you just aren’t thinking about it right!
I know why many traders don’t focus enough on capital preservation and risk management. Because they mistakenly think it’s not “fun” or “exciting”, but that’s only because they aren’t thinking about it right or they don’t fully understand how powerful it is.
You see, the KEY to making money over the long-term in the markets is simply staying in the game.
You need to preserve your capital good enough so that you stay in the game long enough to see your trading strategy play out and reward you.
The only way to make consistent money as a trader is to have small losses (because you will have losses so better to keep them small) and a few big winners in between. It seems simple, but if you can’t do that, you can’t make money.
Now, the hard part in all of this is having the mental state of mind to manage capital properly on a per-trade basis, one must consider dollars risked on the trade and also the leverage used, one must also calculate if this risk is justified but not get too emotional about it.
You should always have a max dollar loss per trade pre-planned, but you may risk less than that amount obviously, it all depends on how confident you are in the setup.
In essence, you need to have a mental “obsession” with capital preservation, and drop your obsession about rewards and profits.
Ironically, if you can do this, you will then start to see the rewards that you were so obsessed with before.