Money Management

Trading is only half the battle

Budget, Save, and Invest

When it comes to automated trading, half of the battle is the setup. The other half is managing the capital you are working with. A strategy without money management is like riding a car without brakes; sure, it will get going, but there will be no way to stop it when it starts going downhill. There is no way to talk about automated trading or risk management without money management, as it is the foundation of the plan.

A plan with no capital is a hypothesis.
A plan without managing capital is an experiment.
A plan with carefully managed capital is a success.

Even a poor trading system could make money with good money management.

Jack Schwager

Market Wizards

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With Money Management

One of the best benefits of automated trading is the ability to remove emotion from the way you trade. We often feel a certain level of fear at the thought of losing money, often outweighed by the thought of the big win that sets us up for life. The key is to focus on that fear and turn it into a tool for intelligent investing.

This can be done by controlling how much of your capital you invest and keep it at a safe level to make sure that you build safely, even if that means it is slower. This coincides with the idea of risk management, as you will better manage your money by avoiding risky strategies. Don't put all your eggs in one basket!

This is where diversification comes in. There have been many success stories of investors who have built slowly and carefully from small bets. They may not be resounding victories in the short term, but a little here and a little there adds up over time to a stronger, more managed portfolio.

Without Money Management

Recovering from a loss is not linear, and becomes exponentially more difficult to recover from. While it sounds overwhelming, it is an important thing to remember when trading, as this is your money we are talking about. The way we live now depends on it, so it is important to be smart about how we manage money.

Think of it this way. If you begin digging a hole and piling the dirt next to the hole, each scoop creates a larger distance between you and the top of that dirt pile. This will effectively be making a deeper hole from your perspective.

This is the way recovery from a loss works out. A 10% loss requires an 11% gain. This continues exponentially to a 90% loss requiring a 900% gain for recovery.

Take your time and plan for your money management. What’s great is that Tuned can help.

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