As I always say that money management is one component of a complete trading system. In this article I will paint a clearer picture about the effect of money management in trading. In addition, expectations are brought to the negotiations to discuss here, as it relates to dealing with money.
An understanding of how the financial management relates to your trading, consider the following example. Although the example is not the game is commercial, it is still worth examining for the trading and gambling have many aspects. What follows is an example of this coin to illustrate why retailers need to manage their own money. Let it be said that if we bet on heads or tails, and we are betting only on the heads-up.
If we win, every time the head of the coin in place, we have $ 2. If we lose, every time you lose the tail of the coin in place, we are only $ 1. Since the chances that the coin landed heads and tails are up to 50%, we will simply assume that if you take a coin and again in the air 100 times, it will land head up for 50 hours and the remaining 50 will land tails up.
Therefore, after taking a coin and place it in the air 100 times. The results are as follows:
50 returns land heads-up: You Win 50 x $ 2 = $ 100
50 tail folds Country: loss of 50 x – = $ 1 – $ 50
$ 100 – $ 50 = $ 50
In the example, we end up with a profit. If we take into account, we see that we still have a chance to make gains and losses in the long term. We demand that this game is a game of positive expectation. After a positive expectation, it means that you experience some degree of positive returns.
Now back to dealing with money. The same example is tossing a coin, what if we do not bet, do the same amount of money happens every time. According to Ralph Vince “Portfolio Management Formulas,” if our original account is $ 100, so that bet, if we have a total of 25% account each time we $ 36,100 after 100 flips. If we bet 51% of the account every time our account with only $ 31 will be reduced.
You will see that a change in the level when the evaluations, the results can be very different. However, only good governance is not enough, you need a trading system that has a positive expectation to maximize your profits.