Finance Wealth Management
In the financial markets, there are crowds of people who do not have the slightest idea about the principles of money management in market conditions. And only after losing the deposit few of them begin to understand that they need a system and some rules.
They begin to seek information on how to properly manage their money to save it and be successful on the market. In other words, they need competent financial management.
In this article, you will get complete information from NEXTCENT about what is finance management in trading, what are the rules, and learn to notice typical mistakes to avoid them.
Goals and Objectives of Financial Management for a Trader
In money management two factors should be taken into consideration at once – risk as such and reward for it. Most beginners focus only on one of them, which in itself leads to a logical failure.
You must learn to correlate one and the other, take into consideration the percentage of profitable trades and loss-making ones and constantly maintain the proportion that profits overweight losses.
These are the main objectives:
- to ensure the investor’s survival on the exchange, so that he can avoid a major risk, which can potentially lead to collapse;
- to provide even a small, but steady stream of profits;
- lead the trader to super profits. If the second and the third ones do not always work, then the first point should be followed in both cases.
The main principle logically follows from this:
Traders become unsuccessful only because they violate this key rule, betting their entire deposit on one trade. And the final ruin comes to those who try to compensate for a lot of losses in one fell swoop.
There is a working scheme, which allows for reducing risks to a minimum and increasing profits:
- Establish an acceptable position size
- Calculate the maximum acceptable amount of losses per position
- Analyze and estimate the potential of the trade – what is the approximate ratio of risk and profit it brings
- Decide on how to limit the risk.
- Make such decisions regularly.
Financial Management Mistakes in Trading
Pay attention to the following points and try to avoid them in your trading process:
- Emotional Trading.
Lots of money or frustration with tilting are equally quick to lose vigilance and increase the volume of transactions to the point of losing the deposit.
- Trading more than 25% of the deposit.
It’s simple – at a loss of 10%, you should make at least 12% of profit, to cover losses and be in the black. Lost 25% – then you have to make Z0. The danger is that when losses increase in arithmetic progression, then the amount of profit that is needed to cover them grows geometrically.
- Withdrawal of the entire deposit to the exchange.
It is fraught with the risk that you simply will not be able to stop in time. Besides exchange hacks and withdrawal of all funds are possible.
- Search for the Impossible.
The vast majority of beginners do not want to do anything else. They doom themselves to failure in advance, because there is no natural strategy that is guaranteed to bring 90% or 100% profit.
The Rules for Successful Financial Management
It should be said that the same rules of money management are equally suitable for Forex, stock markets, and crypto.
- Do not keep the entire deposit with one broker.
Choose several, and very competently – otherwise you won’t be able to withdraw your earnings, and the company will disappear with your money. But even a normal, decent broker can have a situation where you risk losing the only deposit you have. To prevent this from happening, divide your money into several deposits, and open accounts with different brokers, following the same principle that the losses at one broker will be more than offset by the profits of the others.
- Combine several different strategies
Make a habit of using several instruments, but do not get too carried away. Moreover, the more tools, the more money is needed. Trading only one instrument is also unprofitable because market volatility can drastically change. And the asset that you accurately analyzed yesterday will not yield anything today except losses.
- Any strategy can be profitable in skillful hands.
All strategies are good if they fit your character, trading style, and peculiarities of your psyche, and you master them well. It is incorrect to bind yourself to only one strategy because the market is volatile. Today you had one profitable strategy, but you don’t know what will happen tomorrow. Trading only one strategy makes you vulnerable. When you have at least 2 or 3 strategies, you can use them on one deposit or several at different brokers.
- You enter the terminal without any clear objective.
How much profit do you want to make today? Or how many percent is the deposit to get? Plan any adequate amount for you. If by lunchtime you have received $ 100 profit, as planned – turn off the equipment and go have a rest.
Remember that the simpler the rules, the easier they are to follow. After all, it is not the rules themselves that make you successful, but your ability to follow them.