If you fail to use money management you are at risk of being wiped out in a very short space of time.
Many successful traders will only risk a very small amount of their trading capital per trade i.e. 0.5%. Of course, they will add to trades when they are in a winning position but they are disciplined to put a limit on their initial risk per trade.
The good thing about risking such a small amount is that losing trades will not make a big dent in your total pot.
If you were to split your account into units, risking one unit per trade where one unit is 10% of the total starting capital, your entire account would be lost after just 10 losing trades.
However, splitting your capital into units of 0.5% per trade would require 200 losing trades in a row to wipe you out.
Before starting to trade it is worth assessing your position in terms of money management and formulating a plan. You must stick to this plan and not allow yourself to overtrade no matter how certain you are of a particular move in the market.
First of all, decide exactly how much money you can safely use for trading. This should be "fun money", funds which you can afford to lose.
It is not a good idea to borrow money or use money that you need in order to pay for everyday essentials such as your mortgage, rent or bills.
Note: If you do not have any spare money to use as capital it is advisable to paper trade whilst you save up the money. Capital Spreads provides a free £10,000 virtual trading account which you can use for risk free trading practise. (Link opens in a new window, scroll down until you see "Try a Demo Account").
Although many spread betting companies will allow you to open an account with as little as £100, a minimum of £1000 is recommended. Even with this, you will have to risk a large percentage of your total pot per trade.
£5000 would be a better starting point as you could afford to risk 2% (£100) per trade yet still meet the minimum bet sizes for a reasonable range of markets.
Next, decide your total risk per trade. It could be 5% or 0.5% but it should be enough to allow you to cover the margin on trades yet not too much that you are wiped out after a small run of losses.
For a £1000 account, you would probably have to risk a minimum of 5% per trade - £50.
Whatever you decide to risk, write it down and stick to it. This forms part of your trading plan.
Note: If you find that you only have £1000 or less, it may be worth trading via a fixed-odds bookmaker such as BetOnMarkets. Minimum bets here can be less that £5 and your losses are strictly limited to the cost of the bet. You can also open a free £10,000 virtual account here (Link opens in a new window).
An example of a money management plan is as follows:
- I am willing to risk a total of £2500.
- This is my "fun money"
- I am assigning 4% of this risk capital per trade
- My total risk when opening any one trade will never be more than £100
- I will be using a combination of spread betting and fixed-odds betting in order to try and profit
- On building my account up to £5000, I will now risk 3% per trade, or no more than £150.
- On reaching £10,000 my risk per trade will now be 2% or £200 per trade etc
Write it down and stick to it.
Next page - Adding to Trades...