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Money Management

Being a trader for the longer term means being a good risk manager

In a nut-shell, most new traders are under-capitalised and then they tend to over trade, meaning they commit too much money to one trade. Taking a conservative approach is best. As an example to get you thinking in the right way, let’s say you only risk 1% of your capital per trade with say, ten CFD trades, with the (unhappy) result of you losing the ten trades—then you have lost just 10% of your trading capital. You get the picture of how quickly your capital would be wiped out if you traded a higher percentage of your capital?

The 80/20 Rule

Let’s say you have your head screwed on and you have done your homework and you manage to get five of the ten trades as winners and five as losers.  So that’s now a 5% loss. Out of the five winning trades, in reality, one or two will break-even and one or two will make a bit of money, but its normally one or two that will trend well (if your method allows winners to run) so basically you will make your profit out of one or two trades, so you will make 80% of your profit out of 20% of your trades. 
I hope this points out the importance of handling money.

And sometimes it’s not actually the trading method that’s important, it’s actually the money management. In fact money management is one of the few topics professional traders agree on as super important.