It's all about size... position or risk control
The exercise of prudent money management encompasses many methods and skills, intertwined with the trader's reasoning. Failure to manage money wisely exposes the trader to the deadly risk of collapse, ultimately leading to the likely loss of assets.
Whenever I hear about the trader making huge profits in the market, trading on a relatively small or medium-sized trading account, I know that this trader is probably not following sound money management rules (Money Management). In this case, the trader must have put his account at excessive risk because of the abnormally high size of the trades.
In this case, the trader (or a more appropriate definition for him would be "player") may have been fortunate earlier, which led him to a "golden stream" of profits. If he continues to trade in this manner further, then according to the law of probability, it is only a matter of time before the happy hours will run out and huge losses will outweigh the gains and, eventually, lead to probable ruin and complete loss of assets.
Whenever I hear about the trader who trades the same lot in every trade, regardless of size DepositsI know that he also does not adhere to the basic rule of money management - he does not calculate the required amount of trades for his account. If he did, the size of the trades would change from time to time.
In order to correctly manage your assets in this way and reduce the risk of losses, you must first make sure that the chosen option of the strategy suits you. Usually, confidence in your Money Management comes after a trader has experienced some frustrating big losses, and then he wants and needs to change his perspective on the matter. He must find an alternative and understand how inappropriate trade size actually harms trading.
Beginning traders tend to think that the only result of their trade will be to win and therefore do not think about risk. Professional traders focus on risk and make trades based on a favorable outcome. Thus, "money management psychology" begins when a trader understands and acknowledges that the outcome of each trade is unknown at the time it is made.
This confidence makes the trader ask himself: "how much can I afford to lose on this trade without risking the entire deposit?" When traders begin to ask themselves this, they begin to adjust to the market, change their trading volume or lower their stop order level before entering the market. In most situations, the best solution is to focus on market dynamics.
During periods of decline risk control becomes very important: when making losses, traders start taking the strategy and the trading process more seriously, checking trades and calculating volumes, which gives them more confidence in how much loss the tactic can give, relieving themselves psychologically. Understanding this information allows the trader to determine the appropriate percentage of risk for each trade.
Regardless of which trading system you use, the author and fortrader.org magazine strongly recommend that you calculate the appropriate trading volume per trade according to the strength of the signal, the deposit, and the strategy parameters. This will not only allow you to avoid losing your deposit, but will also give you the opportunity to trade with less excitement, because you know that if you incur losses, they will not exceed a pre-calculated amount. If you trade this way, you reduce stress and anxiety by allowing yourself to focus on the market.