How do you put money management working for you in as simple a manner as possible?

Reading through all the money management books can be very dry, which is why I’ve simplified the entire trading concept and philosophy into a super simple, short and easy to understand format for you.

To illustrate a key concept of money management and expectancy in trading, I’m using a very, very simplified explanation of a very important trading concept.

Understanding this key concept in trading will help you to stop searching for the elusive, non-existent Holy Grail of 100% wins, and actually focus on what’s relevant and important in trading.

So pay attention.

The Truth of the Holy Grail

In as simple terms as possible, you’re looking for a system that puts you in profit after a series of both WINNING and LOSING trades. There are 2 key points to note for you to have a better grasp of this concept.

1. Number of winners/losers
2. Amount won/lost per trade

For example, you have a trading system that wins 3 out of every 10 trades. That sounds quite horrible, doesn’t it? Your trading system only wins 30% (3/10) of the time.

When you see this, you might be tempted to just throw the system out into the trash, and start working on your wonderful idea of how you can win 99% of the time, and not give this particular system another glance.

Basic Money Management Concept

This is where basic mathematics comes in together with simple Money Management.

What if this trading system wins $5 on each winning trade, and loses $1 on each losing trade? Let’s take a look at the numbers:

You may not like Losing, but the end result is that you’re Making Money!

3 winners x $5 = +$15 net profit
7 losers x -$1 = -$7 net loss
Total Net Profit/Loss = +$8

Hey, you’re actually making money! You may not like going through the losing trades, but the end result is that you’re still making money. And as a beginning trader, it’s not whether you like your system, it’s whether your system makes money for you.

You have to focus on what works, and what doesn’t, and forget about liking or hating a system. While it would be easier to trade using a system that you like, the more important part of becoming a trader is learning the relevant facts first.

After you understand what works in the market to make money and what doesn’t, you start becoming a better trader by trading what works and throwing what doesn’t out the window.

Summary

One of the truths in trading that you have to understand is that the win/loss percentage isn’t the most important part of trading. It’s whether you make or lose money after the dust settles is what counts.