Successful trading – as opposed to losing – is by no means all about the successful trader picking winning trades. No one can trade and not experience losses because such things are the very facts of trading experience from which no one is totally immune.
Money management is about accepting that a large element in any trade is the random element. The market is an inexact silence and invariably a gamble. A successful trader knows that losing trades are almost inevitable and in order to manage his money successfully he must make allowance for that. Records show that many traders with a very successful record have a success percentage of barely more than 50% and the most successful rarely score more than six out of ten.
The reason that so many traders end up as losers is that their money management skills are faulty. They view the world far too optimistically and don’t take into account the possibility of a long sequence of losing trades. Here’s an example of a trader who started with $8,000 and needed $2,000 as a minimum margin requirement for each trade. All it takes is eight consecutive losses and the trader is broke (if account fees are counted in, six losing trades would do it). Bad money management can easily prove disastrous. You need a good cash reserve to guard against a persistent pattern of loss.
Every trader must have a structure for his trading policy and he must be able to manage his money. When markets move, the movement itself presents opportunities galore but the way you deal with those opportunities is not as important as having a proper trade structure and above all having enough funds to be able to cope with any losses when they come – as they inevitably will.
You simply cannot make money in the long run from entering and exiting a trade if you do not follow simple rules of trade structure and money management. Eventually things will go wrong and there will be losses. If you plan for them, you will succeed. If you don’t, then prepare to join the swelling ranks of the losers. That is the greatest lesson of all.