Proper Money Management and Risk Control means never putting yourself in a position that one bad trade, or even a series of 10, will put you out of business. Remember, your primary business objective must be to stay in business.
What is Money Management and Risk Control?
Money Management and Risk Control is the portion of ones business plan (trading system) that tells you how much you can risk on one trade. What amount of risk should you be willing to take? A proper Money Management component to your business plan not only assures your longevity simply by not allowing large positions, but also by removing significant psychological barriers in trading. Let us quickly quote Larry Hite from the book Market Wizards (which we would recommend you all read) by Jack Schwager. "Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical." Larry Hite. Mr. Hite manages futures, and the risk control modules used are slightly different, never-the-less the principles are much the same.
Incidently should you be thinking you can not make good returns taking such small risk you should know that when Market Wizards was written (1988) Larry Hites funds had a compounded average yearly return of 30%. This was done taking probably the lowest risk of any trader I have heard of. How many funds consistently do 30%, not many. If you can consistently make 30%, people will beat your door down begging you to manage money for them.
Brandon
