The Art of Money Management in Trading

One of the questions that I get all the time in our live trading rooms is: “When you are confident of your income strategy, when and how do you scale up in contracts?” It’s a great question and a sign that someone is progressing on their path to financial freedom, but there’s a number of ways to do it right…and several more ways to do this wrong!
 
First off, I caution investors that there seems to be an unwritten rule in the universe that “the very first trade that you scale up will be a loser.” I’ve seen this same thing happen to me in the past, and I think I know why this occurs…it’s because you get much more cautious when you’re carrying a larger position and you tend to trade not to lose instead of trading to win. Someone will conduct themselves in a markedly different manner when they are confident and expect to win a small trade, versus the tentative and fearful steps that someone takes when they are scared of loss. You’re not used to the heavier risk element of the larger position and it affects your behavior. 
 
So how should someone scale up if they’re doing well? The first answer is to have a money management plan that shows your position size based on your available capital for that strategy. Take the guesswork out of the challenge and map it out. 
 
And this is required for a sophisticated money management strategy like “Fixed Ratio Money Management.” This is a strategy that can lead to hockey-stick like performance graphs IF you have a positive expectancy strategy, AND you can follow a plan. I will be adding this strategy to the Daily Target 100 course by year’s end. 
 
But I think that the TRUE answer for most retail traders is not to scale up too far with aggressive strategies; find your comfort level (size-wise) and trade UP to that point in your plan. Once you hit that level, celebrate your success and then SWEEP that capital down to slower and more conservative strategies that are focused on long-term goals. 
 
And then build up your aggressive account again using money management strategies!
 
The more that you make this an easy plan to follow, the better you’ll do. As always, let us know if we can help fill in the blanks for you. 
 
In your corner…Doc Severson
 
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