How I Look at Money Management

September 13th, 2010

As I’ve increased my trading size over the years, I’ve thought more about money management and the best way to approach it. You can make money management as complicated an issue as you want to, but as with most aspects of trading, simpler is often better.

As I decide how much to increase my trading size, the main question I ask myself is:

How much am I willing to lose in a single day?

That’s really what it boils down to. You are going to have to tolerate big down days to have the big up days so the question really is how much heat are you able and willing to bear to ensure that you catch the profitable days?

If you don’t have a good idea about how much it’s possible for you to lose in whatever timeframe you’re trading in, then you should probably do a little more research until you have that answer. That’s because one day you will lose that much money (and maybe more with slippage) and when the next trade comes along it’s easy to second guess yourself and screw something up.

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