Martingale, Fixed Fractional And Other Money Management Styles For Traders!

02.22.2010 · Posted in Investment

Trading is not a get rich quick scheme. Traders make money over the long haul. They learn to survive the market long term making consistent winners that compound into a large sum over a period of time like a year. Many new traders believe in hitting a quick home run. They gamble all their money on one single trade that will make them rich. Most end up losing all their money and getting a margin call from the broker. You need to understand the importance of a good money management system. Without a good money management system you will never survive to trade another day. Learn to trade another trade, don’t risk all on a single trade. The concept behind a good money management system is to risk only a small percentage of your trading account on a single trade and keep on hitting consistent winner that will compound into a fortune over time. This is what all the great traders did. You don’t need to have a large amount of money to become rich with trading. Richard Dennis one of the greatest traders started with only $300 and ended up making $150M in commodity trading. You too can do it if you learn the importance of a good money management system. Get the Ultimate Swing Trading Software FREE and learn this 10 minutes a day swing trading strategy that works for stocks,forex, futures, options and ETFs. Turn two hunderd dollars into hundred thousand in 2010 with this Penny Stock Trading System. If you can read an email, you print cash with these 1500 pips a day Strignano’s Forex Signals from heaven. One new member made $15,000 in just 24 hours with these signals.

Now over the years many different money management systems have been developed by traders. These different money management systems are used to calculate the position size for each trade. Most of the trading softwares now include the money management calculators with them. You only need to understand the concept behind each money management system if you want to use them in your trading system. A good trading system or for that matter a good investing system has a solid money management system as its backbone. There are many different money management systems. Let’s discuss the pros and cons of the most common money management systems.

Another thing that you need to keep in mind is that stock trading may require a different money management style as compared to futures trading or forex trading. So you need to understand the concept behind these different money management styles as a trader.

Fixed Fractional Money Management System is the most basic and the most widely used among the traders. Under this money management system, you limit your risk to a fixed percentage of your trading account. Usually this fixed percentage is between 2%-10%. For more riskier trading strategy, you don’t risk more than 2% of your trading account on a single trade and for less riskier trading strategy, you may risk as high as 10% of your trading account. As a rule of thumb, don’t risk more than 2% of your trading account on a single trade as long as you don’t develop more trading experience. The second most basic money management system is the Fixed Ratio Money Management System. It is widely used by options and futures traders. If you want to trade options and futures, just type the name of this money management system on any search engine. You will find the formula.

Another money management system is the Martingale System. It has its root in gambling and casinos. But many traders love to apply it in trading as well. Under the Martingale System, you start with a set amount of money, let’s say three thousand dollars. If your trade succeeds, you trade another three thousand dollars. But if your trade loses, you double your amount to six thousand dollars. You keep on doubling the amount, until you have a winner. You might have heard about Doubling Down in a Casino. Well, this is what it is. Under the Martingale System, you will always come out ahead as long as you have an infinite amount of money. The problem is you can run out with your money before you have a winning trade.