It is widely believed that the most important aspect of trading is money management. Money management is fairly straightforward in that it is how a trader manages his working capital. In order for a trader to successfully trade the markets, he must be able to survive through both the profitable and unprofitable times.
How to Survive
In order for an individual to survive in this business, he must approach the management of his capital with a plan. As a quick rule of thumb, a trader should not risk more than 1-3% on any given trade. It is up to the trader to determine which percentage they are willing to risk: 1%, 2%, or 3% per trade. What this practically means is that for a trader with a $100,000 account who is risking 3% per trade should under no circumstance ever lose more than $3,000 on a trade. By risking 3% per trade, a trader can survive 33 losses before they have completely depleted their account. If an individual were to risk 1% per trade, this same trader could lose 100 trades in a row before losing their account. This is a powerful example of how money management is directly related to your sustainability in this business.