Money Management Matters

"Money management is the most important
but most neglected function in commodity trading."

Private individuals, trading their own money put a lot of effort into understanding market movements, different types of system rules and such like. These are interesting aspects of commodity trading, so it is no surprise that they receive a great deal of attention.

But it is easy to overlook money management.

Why?

Because it is complicated. You can't visualize it - in fact to most people it is plain boring.

Is it any wonder then, that private individuals pay little regard to this aspect of their trading? They concentrate on the more 'important' things, like system rules.

What a pity then that money management is so vital - probably much more significant to the performance of their system than the entry and exit rules.

This major fault does not trouble professional traders - not because they are any more interested in the details of money management but because it is all built into their methods and software.

So what exactly does the money management function do and why is it so important?

You can say that money management regulates your system to trade within the risk limit you have specified. It will see that you don't overtrade - which is the most potentially dangerous threat to your trading capital.

Also, it will ensure you do not trade too lightly and miss important profit opportunities that are within your trading limits.

By trading in accordance with your goals and the risk resonance of your system you will have the best chance of achieving success. Otherwise you will be flying blind and very likely to fail.

It is not the fault of the private trader that money management is given such scant attention.

Most trading software on general sale is either weak or entirely deficient on this vital aspect of trading.

Then what is the newcomer to commodity trading advised to do?

You do not need to get deeply involved in the nuts and bolts but you do need to convince yourself of the importance of money management.

You should study any relevant material on the subject, including the methods of the professional traders.

Then, only choose trading software that you know meets professional standards. Ideally, this will be software that is used by successful commodity traders.

 

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Copyright David Bromley 2006
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