The art of capital management

Trading on the financial markets regardless of the tools you use is a relatively complex and labor-intensive process. You need to have a general understanding of the basic theories and concepts that empower you to invest more effectively. In this article, we will explore questions such as money management. Many professional market participants consider this concept to be the cornerstone of success trading financial assets and one of the most important aspects of trading. This likely doesn’t come as a surprise, as you can only achieve the best results if you manage your capital well. Our main goal is to give you a clear breakdown of the most effective conditions for financial trading that protect traders from large losses of capital.

So, money management is a broad concept that includes both technical and financial aspects of managing investment funds. Although online traders have definitely expanded on the classic concept, today off the bat money management encompasses several factors of working on the market, risk management, an investor’s financial means, the total extreme financial indicators of contracts, choosing the best time frame for trading, and the most effective assets to invest in. Despite the broad range of knowledge, money management remains a critical aspect for successful trading. We recommend going through the main problems traders face in this area, such as the approaches and the principles of money management as applied to trading on the futures market.

 

The art of capital management

 

Psychology and capital management

Despite the fact that money management, as a technical process of calculation, can be compared to accounting and economic calculations, the leading factor, in this case, is actually psychology! Judge for yourself, it is not hard at all to learn how to best calculate the most lucrative trading signals. Moreover, there is a wide variety of specialized technology and approaches, as well as expert recommendations available to help. However, calculations alone don’t work for one simple reason, the vast majority of traders can’t maintain control over their own emotions. This negative factor that has a significant influence on your final trading result. Amongst the primary emotions and mental states that negatively influence how effectively investors trade on the financial market, experts break them down into the following:

● Fear of the market – Traders’ low self-esteem and their uncertainty are negative drivers that stand in the way of many traders’ achieving their goals on the market

● Fear of losing capital – The vast majority of new traders are afraid of losing their own money, leading them to make many mistakes, compounding the situation

● A gambling mentality – It is no secret that trading is compared to gambling. Participants can be susceptible to viewing it as betting. This type of mentality specifically is a trader’s arch nemesis

● Stress – Trading on the financial market is very difficult and is such a labor-intensive, highly-analytical process that it can lead to stress as a physical reaction to negative trading signals. Some psychological factors alone, traders can experience real physical pain!

● Depression – For traders on the market, such a mentality is typically the consequence of failure. However, it needs to be viewed within the context of a collection of psychological factors, because in such a state traders’ make a significant number of mistakes that negatively impact trading signals

This emotion, in particular, prevents traders from managing their funds as they should. It is the primary reason that leads to financial losses for the vast majority of traders.

To resolve the problems related to capital management, we recommend some basic rules and approaches that will enable you to achieve the ideal money management conditions. That being said, in order for you to best grasp how they should be used, we first need to highlight common mistakes that trader make on the financial market.

What mistakes do online traders make?

The primary problem of non-exchange traders, especially beginners, is a failure to rein in and manage greedy impulses. Essentially, the overwhelming majority of new traders quickly realize the financial potential the market has to offer and the opportunity to profit from any trading tool, leading them to get the idea that trading is easy! This “fact “of the financial market is quickly proven to be false. Investors who approach the market without seriously evaluating risk, whilst adhering to money management guidelines, always lose their money. As a result, due to greed, and failing to approach money management thoughtfully with discipline, traders lose their capital. It all happens very easily and many of you likely see yourselves in such examples. Hoping to earn as much as they can in as short a time as possible, traders increase the cost of their contracts in relation to their total capital. This means that those traders who end up with several negative results experience critical losses! Or, as another example, say they lose their deposit, the investor is now emotionally driven to try to recoup their balance as quickly as possible. We’ve already touched upon the emotional side of trading above and explained how certain factors have a negative impact on trading. As a result, their mistakes compound and their result only becomes more devastating up until the point that their entire capital base is gone!

Conversely, experienced traders are disciplined. They consider money management to be the most effective approach for working with investment tools, as when money management is approached correctly, they can generate profit from the financial market reliably. There are simple approaches to discipline that produce great signals and enable you to dynamically achieve your financial goals relatively quickly.

Effective money management

When considering money management as a basic tool for calculating financial risk in trading, it is worth mentioning that the primary parameter for this is an effective relationship between the total trading funds at an investor’s disposal and the cost of a trading position. In order to trade safely, traders should clearly define the risk indicator for every contract in relation to the current market situation. For this, each investor needs to set a defined risk limit, that is never violated regardless of the situation. To put it simply, if you have $100 in your trading account, you should never open a contract totaling $50, or worse, worth the entirety of your available trading funds. In such a situation, if you were to take a loss on the contract, you would automatically lose half or all of your trading funds. A standard plan for minimizing trading losses is setting the maximum level at 5% of your total trading funds. It isn’t worth seeing this level as a benchmark as the problem lies in the fact that every trading position requires an individual risk analysis. The current level of market volatility for forecasting rates, your total available capital, and your emotional wellbeing should all be accounted for in your assessment. Of course, with such a regime you decrease your potential profit per contract, however, in return you trade in such a way that limits financial risk.

When following these basic risk management rules, you need to take care in choosing an online trading partner, including doing in-depth research into the trading conditions provided. So, say the standard minimum deposit on the platform is $300, with positions from $50, you won’t be able to effectively manage your money. On that note, our recommendation is both simple and logical. Work with a platform that offers the most flexible and accessible financial conditions. For example, you can start trading with only a $10 deposit, as well as placing contacts with as little as $1.  You can effectively follow the basic principles of risk management.

The second, rather significant aspect of money management is you shouldn’t overextend your deposit with a large number of trades. The simple, classic example would be an investor who adamantly adheres to their set risk level per market position, however, at the same time, they not only open one but several trades. Such a situation looks like this: with a deposit of $30-$50, the investor opens over 10 trades worth $2 each. However, it isn’t uncommon on the market for a situation to arise where all contracts close with negative results. In that happens, the trader would lose a significant portion of their deposit. A simple conclusion should be drawn from this. You should not only effectively define the relationship between your total available funds and the cost of specific trades but also the total in combination. In accordance with the primary principles of capital management, ideally, no more than 10% of your total funds should be tied up in trades. By following such a regime, you won’t experience critical trading losses, leaving you free to generate a stable profit. Other than that, such a minimum level of active trading funds enables you to survive any deposit loss, also enabling you to profit from contracts that at first glance appeared to be losing.

The vast majority of experienced traders take approaches like risk diversification to create a safe regime. In this case, investors place a series of trades on various assets and contracts with a range of different profit levels. Thus, other profitable contracts compensate for any losses. Without a doubt, it is a very effective trading approach for managing risk and generating profit. That being said, without individual, concise analysis on every position, combined with a disciplined approach to money management, you won’t achieve good signals. Therefore, don’t ignore the art of capital management, it will help you increase your investment funds.

Another important point is that you should test trading strategies out for yourself to best assess the risks. The problem is that these days there are a significant number of systems for analyzing rates on the financial market and traders are more than happy to take advantage of them for trading. That being said, before you invest your own money in a contract based on such a system, research all the aspects of how it works, especially accounting for the level of risk it carries. To do this, you need to spend some time testing the strategy on a demo account, so you can understand the general risk level of the system and you can make adjustments to the system based on your capabilities.

So, the art of capital management is a comprehensive framework that can be explained through the following recommendations:

● Approach trading contracts with a clearly defined relationship between contract cost and the size of your account

● When you are assessing the risk level, take into account the total number of positions you have open and the total amount of your trading funds that are currently tied up

● Consider the main technical indicators when you evaluate the risk: volatility, the quality of trading signals, the time you are trading, your choice of base asset, the potential profit of the trading position, the historical rate fluctuation

● Keep your emotions in check and succumb to negative psychological factors

● And, of course, keep expanding your own trading experience and knowledge of the technical aspects of trading

As you can see, the basic principles of capital management for trading on the financial markets are not complex in nature. Of course, there will be a point where some investors will struggle, however, correctly approaching it will without a doubt enable you to avoid both significant and critical losses.

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How to master the art of capital management?
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