Today wanted to talk about consistency and money management and how they work together hand in hand. I have seen a few blogs about this so wanted to approach it from a different view and focus on the actual numbers so you can see how important it is.
I am hoping this will help out new traders to help them establish a plan to demo and to know when they are ready to go live, and for some of those traders out there who have been at it for a while are doing good but not seeing profits due to a lack of any type of money management.
Consistency, basically all this means is that you can reproduce your results over and over, you may not be able to do it all the time but in my opinion your goal should be 65% of the time on a weekly basis. Consistency also bleeds over to money management, if you are not consistent with your money management you might as well not be trading.
Let's focus first on the new traders getting into trading, and how you want to go about determining when you are ready to go live. The majority of brokers require you to deposit funds to be able to access a demo account on their platform. You can get a zero deposit demo thru Markets World, just need to provide them with an e-mail address. Great you have your demo account and you are ready to roll. Before you let loose your trading skills on that demo account lets stop and jump back to reality. They may have given you an account with $1000.00 in it but unless you are going to deposit that much money then you need to now start to form your money management plan.
For educational purposes i am going to say the broker has a $250.00 minimum deposit, and a $10.00 a trade minimum. That means you will be trading 4% of your account. For me that is an acceptable amount and fits into my money management plan. We will get more into actual money managment next. For the purpose of your demo you want to do only $10.00 trades until you double your account and have reached a 65% ITM level. The smaller trade amounts have 2 purposes. One if your broker only gives you one demo you do not want to burn thru it by taking crazy sized trades just to see crazy big fake numbers. Two you want to start off right and get used to using proper money management, get a feel for how you will really be trading and how the account will grow.
I recommend doing this process two or three times. It will ensure that whatever trading style or system you are using is sound and reliable and will serve to boost your confidence when you go live. If you can not hit 65% ITM per week its back to the drawing board. PIck a new strategy and work on your trading style until you can hit the above goals.
Woohoo you did it (I hope) so what's next. Money Management.
Why is that 65% so important. Depending on your broker and payouts that is when you become profitable. Back to our imaginary broker. You have deposited $250.00 and for the first month you will only be placing $10.00 trades. To keep this simple we will say you placed 100 trades your first month, and your broker has a static payout of 70%. So that means you had 65 ITM’s and 35 OTM’s. Each loss would be a -$10.00 to your account balance, and each win would put your account up by $7.00.
WIN x 65 = $455.00
LOSS x 35 = $350.00
Net Profit : $105.00
Are you rich no but you did not lose anything either by using proper money management. Now if you decide to roll that $105.00 over let see what happens using a 5% money management plan over the next few months.
Month 2: New Balance $355.00
$17.00 trades a little below 5%
Each trade would profit $11.90
Each loss -$17.00
WIN x 65 = $773.50
LOSS x 35 = $595.00
Net Profit : $178.50
Month 2: New Balance $533.50
$26.00 trades a little below 5%
Each trade would profit $18.20
Each loss -$26.00
WIN x 65 = $1183.00
LOSS x 35 = $910.00
Net Profit : $273.00
As you can see the account grows nicely each month and the chances of you blowing your account diminish.
This was using simple money management. How I trade on a day to day basis is I adjust my trade size after each trade, and your account will grow much faster. The file is attached below. Simply enter your current account balance and it will tell you your next trade size.
If you are in this for the long haul you need to have the right mind set that you will not get rich quick and by following the steps above it should help you to develop a sound Money Management plan to add to your overall trading plan.
If you have any questions as usual feel free to hit me up.
Hit me up on skype at Brymcafee (McAllen TX)