Having good money management is a core component of being successful at swing trading and just being a successful trader in general. Without fully understanding how to properly implement money management, many traders fall into a vicious trap while trading. If traders don t manage their trading capital properly, it is not uncommon for them to increase the size of their trades too quickly. They do this with the hope of increasing their returns exponentially. They experience a few winning trades and then make the incorrect assumption that if they increased the size of their trades they would be able to profit faster. However, traders who adopt this style of poor money management typically end up with nothing but losses and a zero balance in their trading account.
Good money management is based upon the following main points: Detach yourself emotionally from the money, never trade more than you are comfortable with and never risk more than what you stand to win. It is these three basic principles of money management that allow many traders to turn a system that breaks even into a profitable cash machine. It is also these three very basic core principles that many new traders completely neglect and do so at their own peril. If you want to give yourself a real trading edge, don t make the mistake that most traders do by not fully understanding how you should properly implement money management.
First, you need to remove any kind of emotional attachment to the money you use for trading. Make sure that any money you plan to use for swing trading is money that you can live without. This isn t about failure or the worry of failure. It is about being smart. Trading with money that was set aside for other more important needs will only add stress to your trades. Do you really need to make trading any more difficult by worrying about how you will feed your family if you lose next week s paycheck? I hope not. Using trading capital that has emotional attachments means you will be focusing more on your emotions while trading instead of what you should be doing to place a winning trade. You might not know it but trading like this means you are setting yourself up for failure right from the start.
Second, start trading with small amounts. Don t rush yourself and obsess yourself with how much money you can make. The market has been around long before you began trading and will still be around after you are gone. Put things into perspective and focus on the long term instead of the short term. How small is small? Your first trades should be small enough that you feel comfortable with them. When trading, you want to focus on placing winning trades and not have your judgement clouded by the fear of losing money. To avoid having this happen, trade with an amount that you are comfortable with. You may even start trading pennies at the beginning, but that is ok. The important thing is that you are in control of yourself, your emotions and your trading.
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