Understanding money management and trade management can be quite confusing for a traders, both new and experienced. It is often the cause of much of the frustration that traders have, as well. Why? Because regardless of the entry method or indicators, all traders will experience a drawdown at some point in their trading endeavor. It is the ability to withstand these drawdowns that will either make or break the trader.
Understanding Money Management and Trade Management
Below is a hypothetical strategy equity curve on Crude Light for 2012 to 2016. The strategy starts out winning and then it loses ten trades in a row and goes into a drawdown of about $3500. A trader with a small account probably could not handle the drawdown and would miss the winning trades because they no longer had sufficient funds for trading. That is what a drawdown can do to these smaller accounts.
Then about midway through the equity curve, from about 110 to 170, there are more losing trades than winners and the trader has given back about $3,000. While the equity graph makes it seem easy during this drawdown, the equity graph is not allocating the withdrawal of profits from the account. If the trader had withdrawn profits prior to the new drawdown (equity ran up to $7k) then the account could be underwater again. However, after the drawdown, the curve goes on to make new highs in equity. If you are thinking this looks similar to a stock, future, or forex chart, you are right. Most equity curves do.
In the last few weeks, I have had several traders contact me about binary options and they cannot seem to win. They were extremely frustrated and did not know what to do. Most of their frustration was the “drawdown”. Here are some examples of the issues from these traders:
- One was feeding their account with $100 at a time. Entering at the money meant they were risking 50% of their account. If they were using ITM (In-the-Money) then they were risking 75 to 80% of their account. This resembles gambling more than trading. I feed in $20 to the slot machine and either I win or I lose.
- One trader contacted me about funding their account with $500 and being able to make thousands of dollars from it, after all there are a multitude of YouTube videos that say this can be done. My answer was, would it be logical to open a new restaurant with $500? Could the restaurant owner survive, buy equipment he needs, pay the workers and expect to stay in business with only $500 of working capital? Probably not because all owners, especially new ones, will go thru their own drawdown.
- Allowing profitable trades to go negative because they did not manage the trade. Instead, they entered and let it go until expiration. So if the trader was walking down the street and say a $20 bill laying on the sidewalk, you just pass it by? Sometimes the market is only willing to give a little — as a trader, you learn to take it.
Utilize the Demo Account – It’s FREE
Plus, most new traders are not fully utilizing their demo account because they have heard demo doesn’t work. That’s a half-truth. Most new traders need to begin in demo because they are learning and they have a lot to learn:
- How to use the platform
- How to measure time versus value of the binary option
- How to use the charting options
- How to use technical analysis
- How to manage trades
- How to implement money management
- How to control their emotions
- How to manage a trade
- How to implement a trading plan
Of course, if the trader acts like the demo is monopoly money and not implement money management and trade management then the trader will not receive the “training” they need. However, if instead of trading 20-30 contracts because they have $25k in their account, they trade one contract and build up a track record, then the demo account will be more rewarding. Sure, they will have some transitional issues when they begin trading their live accounts, but they will also have other developed skills in both techniques that will help them overcome these new issues.
In the upcoming 2-day seminar, this is one of the core concepts that I teach because with good money management and trade management, regardless of how great the indicators are, the trader will eventually blow an account. It is really that critical.