Capital is the most important thing that a trader possesses. Without a trading capital, a trader will have to stay away from the markets as he cannot trade. Hence protecting one’s capital and managing one’s money is of prime importance when set upon a trading journey. It is a better option to make a trade with no profit rather than one with a loss because if the capital is intact, one will be able to trade again whereas if there is a loss a lot of effort is spent in recovering the loss.
Every trade is a risk and risk management is of prime importance. The first and foremost thing a trader should do when taking a trade is to put protective stops. Many traders hate putting a stop loss and those that do manage to put one keep moving it to prevent getting stopped out. A stop loss is a mechanism to limit the risk and taking a small hit and being out is far better than staying on in a trade that is gone wrong.
Another profound mistake most traders make is that they do not lock in profits from time to time and eventually are forced to give up everything they gained and also exit in a loss. Once a trade moves in the desired direction, a trader must start locking profits so that if the trade no longer sustains, he has at least made some gain. A small gain is always better than a big loss. Again, no one ever became poor by booking profits!!!!
Many brokers offer traders an extensive margin to play the markets. This many times is used unwisely which ultimately forces a trader to make greater losses than he normally would. A trader should never use more than 65% of the available margin and must always keep a cushion for unforeseen eventualities.
Another prudent thing a trader must practice is to convert all his trades to cash when the market is at the top or turning points. This allows him to take advantage of the market turns with ready cash and is protected from sudden market movements resulting in loss.
It is also wise to hedge risk and protect oneself from potential damage. If one finds himself in a position where the instrument he bought starts moving down instead of up he should immediately find another instrument in the same category which is weak and short it to cover losses.
The last but not the least is to diversify. A prudent trader/investor never puts all his eggs in one basket and always trades in different sectors/asset classes with different risk potential. So if one sector or asset class does go against him, he still has the others to fall back upon.
A sound money management system is what keeps a trader going against all odds. A trader who understands and implements this is the one who will weather all storms and come out a winner!