It is easy to demonstrate that Money Management (MM) is far more important than analysis. A total lack of MM would mean risking everything on any onetrade. You might have the best analysis system in the world and get 99 straight trades right but that 100th trade would wipe you out. On the other hand you might have the worst analysis system in the world. If so a proper MM system will quickly reveal this fact which at the same time minimizing the risk to your capital. So if you get 10 straight trades wrong you still only lose 10 per cent of your capital! It is therefore immediately clear which is the more important. MM is what makes the analysis/system work not the other way around.
The conclusion from this is that it is not entry which is that important – it is exit. This is clearly so, because exit determines your overall risk, your overall profit and your overall control. Now this is quite a controversial statement. If entry is not so important why do all traders spend so much time on it. The answer is because they are misguided. Clearly entry is also important, but not as important as the other factors in trading, in particular MM and Risk Control (RC). To put this in a nutshell: your entry cannot wipe you out – but the way you exit can. Your entry does not make you a profit – the way you exit can.
Money Management - It is my view that any one trade should not incur risk of more than 2 per cent.
Good Money Management is the key to success. Without it even the best trading system would wipe you out.
A good MM approach means adopting a low risk approach to each trade. If you don’t do that it is a racing certainty that you will be wipedout.
Starting with a new system you must use just one contract until your results, i.e. profits, prove that it works for real.
Early and careful monitoring of a new position can minimize risk even more, but don’t be suckered out prematurely.
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