TradeCityPro Academy | Money Management👋 Welcome to TradeCityPro Channel!
Money Management Training Is More Important Than Learning Technical Analysis
Let’s start the channel's training with the most important lesson, which helps us survive in the market, transform from a losing trader to a profitable one, and maintain our peace of mind!
📚 Capital Management in Life
Capital management in life means planning and managing your financial, time, and even energy resources optimally to achieve personal and professional goals.
This concept goes beyond financial matters and includes conscious and responsible decision-making to utilize various resources.
🕵️♂️ Capital Management in Financial Markets
Capital management in financial markets refers to planning and controlling the amount of capital allocated for trading, investing, or activities in these markets.
The main goal of capital management is to reduce the risk of asset loss and maintain financial survival in various market conditions. It is one of the key principles of success in trading and investing.
💰 Trading Without Capital Management
Surely, like me, you have traded before learning about capital management, and some of you might have even been profitable for a while.
However, that profitability has never been sustainable, and at some point in the market, you would lose a significant portion of your capital. Consequently, you might experience severe stress and pressure, affecting your social relationships, family life, restful sleep, and a stress-free lifestyle.
Trading without capital management can bring profits occasionally, but the volatility in your trading account increases significantly, disrupting your peace of mind.
For instance, if you have a $10,000 account, trading without capital management might result in one day making $20,000, but the next day dropping to $5,000. This wide range of volatility and the feeling of gaining and losing capital lead to losing your calm in subsequent trades, making you constantly monitor the charts because you haven’t set any rules for yourself.
What If My Capital Is Only $100?
You might say, “I only have $100; why should I do capital management? A 2% profit on $100 is insignificant.” Here’s the answer: even if your capital is small, you must manage it.
If you consistently make a 5-10% monthly profit on that $100 over a year, your capital might not become substantial, but you’ll become a trader who many investors will seek to entrust their funds to. So, don’t just look at percentages.
💵 Why Don’t Most People Practice Capital Management?
The reason why 95% of market participants don’t practice capital management is that they see trading as a get-rich-quick scheme.
Unfortunately, due to misleading advertisements designed to empty your pockets, many view trading as a shortcut to wealth.
Trading is a long journey; without practicing capital management, you might turn $100 into $10,000, but you’ll lose it all in the next trade.
This isn’t poker, gambling, or any similar game. Markets are far more unpredictable. Without setting rules for yourself, you’ll be eliminated quickly, and your money will go to those who stay in the market.
💼 Defining Risk in Capital Management and Setting Daily Risk Limits
While practicing capital management, you must define your daily risk limit. This means deciding the maximum percentage loss you’re willing to accept before closing the charts and ending your trading day.
For example, if your daily risk is 1%, regardless of whether you open 4 trades or 2 trades, you’re not allowed to lose more than 1% of your capital in a single day.
Now, suppose you’ve defined your daily risk limit. If you lose 1% for three consecutive days, totaling a 3% capital loss, would you be okay? Would you talk to your family and friends as usual? Would you stay calm? If not, then this isn’t your appropriate risk level, and it needs to be lowered.
Additionally, you should have a monthly risk limit. For example, if your monthly risk (or drawdown) is 10%, you should stop trading for the month if you lose 10% of your capital and return to the charts the following month.
Initially, accepting stop-losses, planning your trades, and adhering to capital management may be difficult. However, you must practice capital management for all your positions, not just a single trade.
You should also set penalties for not adhering to it! Penalties vary depending on each person’s life. Moreover, you should view your profits and losses in percentages, not in dollar amounts. For example, instead of saying, “I made $10,” say, “I made a 1% profit.” Viewing your results in percentages is crucial as your capital grows because focusing on dollar amounts can negatively affect your trading.
💡 Practice and Example on the Chart
Let’s go through an example on the chart to fully grasp the concept. On the chart, you’ll see the capital management formula, which includes:
The total capital you’re using for futures trading.
Your risk percentage, which is your position and daily risk discussed earlier. For instance, if your daily risk is 1%, your position risk could be 0.25%, 0.5%, or 1%, depending on the number of trades, but this is specific to the position you’re about to open.
On the other side of the equation is the position size, which is the unknown we’re solving for using this formula. Next is the leverage, which is set in your exchange and doesn’t significantly impact your capital management. Finally, there’s the stop-loss size, which is determined using the position management tool in TradingView.
Now, let’s apply the formula to a Bitcoin trade with a 4% stop-loss and a risk-to-reward ratio of 2.
Suppose your total capital for futures is $1,000, and you’re willing to risk 0.5% on this position. The multiplication of these two numbers gives $500. On the other side of the equation, we’re solving for position size in dollars.
Assuming a leverage of 10 and a 4% stop-loss (as shown in the example), the multiplication of 10 and 4 equals 40. Dividing $500 by 40 gives us $12.5. Therefore, you can enter this position with $12.5 using a 10x leverage.
❤️ Friendly Note
If you don’t practice capital management or don’t agree with me, that’s completely fine!
But take a small portion of your capital and trade according to the explanation above. See if you feel calmer and more at ease. Afterward, decide what’s best for your life.
Finally, try to share this article as much as possible so that people don't lose their money in the market because it's not just their money that makes them frustrated and their pride is lost. Let's help them with the help of the community!
