A former hedge fund manager once told me: “You’re not a trader – you’re a money manager”.
When people think of trading, their minds often gravitate toward stock picks, chart patterns, or the latest RNSs.
Let me be clear. These are certainly important. But the most critical aspect of trading success often goes overlooked: money management.
Being a great trader isn’t just about spotting opportunities. Again, that’s certainly a key part of it. But it’s about managing your account and sticking to a robust strategy.
Traders must think of themselves as money managers first and market participants second. It can make or break your success in the markets. I recall back in 2019 a gentleman came to me saying that he’d put almost all of his account into an oil stock that was rumoured to have struck oil.
He’d borrowed money to do this and was reliant on the stock striking oil otherwise his account risked being significantly depleted.
However, all a trader can do is map out scenarios and create a plan.
I spent hours walking him through the various possibilities and what could happen, based on market positioning and punter mentality.
We came up with a plan and he said whatever happened he’d be liquefying his account on the bell.
If it was a strike then he’d get out with a profit and count himself lucky – and if it was a duster then he’d escape with whatever he could.
Well, Monday came. And good news! The company had found oil, and it was gapping up.
I bought some stock and sold quickly for a small scalp trade, and the stock rallied, then started pulling back. It kept pulling back and closed well below its open as everyone used the news as a liquidity event.
I messaged him to say well done as he now had a good chunk of money that he could pay back his debts, and start afresh sensibly.
He responded that not only did he buy more, but he was still holding.
I knew then that he wouldn’t last, and that strategies aren’t everything.
Trading is a numbers game
Trading is, at its core, a probability-based activity. Even the most profitable strategies will involve losses because no method can predict the market with 100% accuracy (sadly!).
And whilst Instagram traders will be keen to shout about their 90%+ success rate, the reality is people who actually trade will rarely be above 60%.
Therefore, the key to long-term success lies in ensuring that losses are manageable and that winners outweigh them over time.
Money management is what keeps you in the game. It ensures that a string of losing trades doesn’t wipe out your account and that your winners are large enough to make a meaningful impact on your portfolio.
Larry Hite’s view on Kenny Rogers
The golden rule of trading is simple: Don’t lose your money. Why? Because without capital, you can’t trade.
Larry Hite said that Kenny Rogers was wrong. As the classic song goes: “You never count your money, whilst you’re sitting at the table, there’ll be time enough for countin’ when the dealing’s done”.
In a sense, I agree. You absolutely should know what is at risk and what you stand to lose. Having an overview of your money means you don’t end up with 20 lazy long positions that all fall together in a market pullback.
Think of trading as a marathon, not a sprint. Your job is to stay in the race long enough to realize the potential of your strategy.
This means avoiding catastrophic losses that can knock you out of the game. Even if you have a profitable edge, poor money management can cause irreparable damage to your account before that edge has time to pay off.
IG Design put out a profit warning this week.
Despite not being able to put out FY25 guidance as it was so bad, people have entered the stock even though this is not a positive expected value trade.
Utilising account management
Account management involves making deliberate decisions about how much to risk on each trade, how to allocate your capital across different opportunities, and when to take profits or cut losses. Key elements of effective account management include:
- Position sizing
- Risk per trade
- Diversification
- Monitoring leverage
Leverage has been the downfall of many a trader. Unless you’re profitable already you should not be going over 100% invested.
If you can’t make money with the money that you’ve got… why would borrowing more make you any more profitable?
Money management is only effective when combined with a clear and well-defined trading strategy. A strategy provides a framework for making decisions, helping you avoid emotional reactions to market movements.
Key aspects of a good trading strategy include:
- Defined entry and exit rules
- Risk/reward ratio
- Adapting to market conditions
Psychology and money management
Trading is as much a psychological game as it is a technical one. Effective money management helps mitigate the emotional highs and lows that come with trading.
My last article will help here.
Let’s look at two common scenarios where poor money management can lead to disaster:
- Overleveraging
A trader with a £10,000 account uses excessive leverage, opening a £50,000 position. A 5% drop in the trade wipes out 25% of their account. Overleveraging amplifies losses and can lead to rapid account depletion. - Ignoring risk controls
Another trader risks 10% of their account on a single trade. After three consecutive losses, they’ve lost 30% of their capital. Recovering from such a drawdown requires a disproportionate return, which becomes increasingly difficult.
In trading, your goal should first be to survive. Survival is the prerequisite for success.
While everyone dreams of big wins (I include myself here), the reality is that staying in the game long enough to capitalise on your edge is the real victory.
Money management creates the conditions for steady growth, even in the face of inevitable losses.
Michael Taylor
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