If I had the right strategy in place and I applied the rules religiously, what could go wrong? This is the misconception that a lot of new traders encounter, which most of time leads them to losing their money and quitting trading all together.
What is it about money management that seems to be the number one factor that causes traders to lose if they do not apply it correctly?
Let’s consider the following: You have a system that is proven to make money over a sample size of trades. If you follow the plan of the methodology, which involves the entries, exits, money management, you would eventually be a consistently profitable trader.
As much as we would love the idea of “just following” a plan, we are failing to pay attention to the main factor that requires massive attention. MIND MANAGEMENT.
The game of trading is psychological, every move you see on every chart is psychologically influenced. Even if you had the best trading system in the world, if your mind management is not in-sync with your strategy, then you will be just another liquidity provider for the traders who understand the importance of mind management and how to apply it with money management.
You can’t have one without the other. PERIOD. The tool you use to apply money management is not a Forex Pip calculator or a margin calculator, they are just to keep traders in the belief that they are actually exercising money management all because they used a calculator. Your mind is the tool.
I have said this before, if I could have my time again when I first decided to study the game of trading, I would first hit the books and find everything I could on improving the way I think.
I come across many traders who are reluctant to discuss their thinking when they make a mistake in trading. E.g. The system didn’t give the signal to sell, or the candlestick pattern didn’t behave a certain way, it’s all nonsense.
The battle that all traders encounter is the battle of their indecision in their minds when they are presented with a scenario that they are not comfortable with.
This is what trading is all about, as with everything in life, if you base your decisions during the emotional imbalances that are developing within your mind, you will forever be jumping from system to system trying to find the next best thing.
So How Do We Overcome This?
Trading can be as difficult as you want it to be. However, I will advise the following.
Money management can only be applied successfully if the right framework of thinking is present. So you ask, “How Do I Change My Thinking?”
It’s all down to perspective. Do you have a desire to learn how the market works, do you want to trade because you like to impress people on a Friday night at your local bar? Whatever the reason, ultimately you will experience many difficult times whilst on your trading journey, if you are out for titles then your journey will be short lived. Forgive my tone, but if you really want to be a trader, then you have to be prepared to take the good with the bad.
There are many money management techniques, some complex, some simple, but the only money management technique that holds precedence over any theoretical money management technique is “SURVIVAL”.
Take a bodyguard. Their sole objective is to protect the “package”. A bodyguard is there to protect, every moment the bodyguard is thinking, “protect, protect, protect”. Their mind is focused on maintaining a level of synchronicity in an unknown environment. As long as the “package” is well, then everything is in order.
Your goal as a trader is to protect your capital. You are the bodyguard of your capital. That is your money management technique. Your mind management involves reasserting to yourself the importance of protecting your capital, your “thinking” will allow you to act in accordance to your money management goal, which is SURVIVAL.
So if you are a new trader, in my personal opinion, focus on developing a mind that is continuously reminding you to protect your capital. Don’t become over obsessed and protect your capital by not trading, also, I’m not saying that you don’t need to focus too much on money management and only mind management, but neither can perform optimally without the other.
As I have said earlier, it’s all about perspective. Once you focus your attention to protecting your capital, you will eventually develop the habit of actually protecting your capital through your trading and you will act effectively to ensure that your decisions are in line with the overall goal of capital preservation.