I’m a futures broker.It’s been my business for the past 22 years, and in the course of my career, I’ve worked with hundreds of traders, from complete novices to traders with more experience than I.Some of the most valuable lessons I’ve learned have been about money management.
The biggest trading mistakes traders make, I think, concern improper money management.I have had hundreds of conversations with traders who are already in a trade, asking me whether I think they should stay in a loser, or where to put in a stop loss for a losing trade they’re already in.This leaves an unenviable task for the broker, as if you tell them to get out, inevitably it turns in their favor as soon as they get out, or moves and stops them out where I suggested a stop, then moves in their favor.
Determining where to risk to, or how much to risk per trade is a crucial step in planning a trade.It’s always best to decide this before the trade is entered, as the decision can be made in a more emotion free manner.Having pre-determined risk helps you trade with confidence, as you generally know the worst case scenario for a trade.
If you find yourself in a trade either without a stop, or with a stop in a trade you’re no longer sure of, I’ve found it a useful exercise to ask yourself: “If I weren’t in this trade now, would this be a trade I’d be looking to enter now?”.If the answer is yes, stay in.If the answer is no, exit the trade and wait for a clearer setup.An old trader I worked with when I started as a broker used to say: “I’d rather be out wishing I was in than in wishing I was out!”.
Try this strategy sometime when you’re in a trade that you’re trying to decide whether to keep or close out.