As I promised last week today will talk about Holy Grail of money management in trading.
So, boys and girls, our Holy Grail and our secret weapon consist of two main parts:
— Risk/reward ratio. Remember these three magical words! Always take trades, where your potential take profits is much higher than your risk. Stop dreaming about super strategies that give only profits and come back to reality. Losses in trading are normal, as utility bills in hotel business. Even George Soros has it. Last year he closed 1 billion in losses. But I have great news — if you filter your trades by risk/reward ratio — you will have great annual returns no matter what. Even if you got few bad trades one by one, you will cover losses and get profits, as your potential profit is always much higher than risk. One profitable trade can cover series of bad trades — isn’t it great?
— Reinvesting. To boost your profits you have to reinvest your profits — so easy, but so important rule. A kind of reinvesting is so called ‘pyramiding’. I adore it. If you are middle term trader and like to catch big trading waves, you have to use it. Believe me you will get amazing results!
So, how it works? As a middle term trader you hold your position till it will reach your take profit and on each pullback you add more contracts. Each of these trades as main as additional need to have separate risk management. Yes, such trades doesn’t often happen, but they give almost all annual return or at least main part of annual return.
I want you to understand that if you don’t have good money management, you will never get consistent profits year by year. But if you have it, you will get great ROI every year mo matter what. Money management in my trading strategy was one of 2 pushing powers that helped me to boost my profits