We know that money management will make money for us in the long run, but now I want to show you another side. What happens if you do not use the principles of money management?
Consider this example:
You have $ 100,000 and you loss $ 50,000. What percentage of your lost account? The answer is 50%. Now, you have to make as many% to the current $ 50,000 to $ 100,000 back as the original?
Not 50%, the answer is you have to earn 100% to $ 50,000 you can have the initial capital is $ 100,000. The rate of decline of such taikhoan called "drawdown". In this example, we have a 50% drawdown.
There is a very important point to be drawn from the above example it is: very easy to very difficult and unprofitable to recoup money lost. I know you are wondering says: "I'm not going to lose 50% of your account in a single transaction." Of course I would not expect that.
However, what happens if you lose in 3, 4 or even 10 consecutive trading? That can not happen to you, right? Do you have a trading system won with 70% rate. Because it will not be something you can lose all 10 transactions. While you have a good trading system
Take a look at the following example:
In the transaction, we are always looking for profit. That is the reason why traders develop their own trading systems. A trading system with 70% profitable sounds like we have a very good profit. But because of your trading system is only 70% profitability, which means for every 100 transactions you make, you will win 70 out of 100 deals, right?
Not sure! How do you know are 70 transactions in total transactions 100 will win? The answer is you do not know. You can lose 30 consecutive trading started and won in 70 subsequent transactions. That is your trading system still has 70% profitable, but you have to ask yourself: "Does your account have the strength to withstand further after you've lost the first 30 transactions? "
This is why money management is so important again. There is no problem with your transaction systems, but in the end you will still lose. Even for the professional gambler they see that their livelihoods are also bad at having lost the campaign, and they still have the ability to end up with the victory.
That's good because the gambling money management because they know that they can not win every game forever. Instead, they only risk a small percentage of their money so that they can still continue to exist after the most difficult assignment.
That is what you must do if you want to become a real investor. Only a small part of the risk taikhoan transaction to you can still tolerate and recover from successive defeats. Keep in mind that if you have a money management principles well that it was done according to discipline, you will always be active in controlling the account.
To help you better visualize, we outline for you what happens when you manage your money properly and when you do not have a clear principle.
Here is a small example to show you the difference between a risky gamble fraction with a majority of your capital.
You can see a big difference between the 2% risk versus risk 10% of your account in a transaction. Starting at $ 20,000, if you lost 19 consecutive transactions, the risk to 10% for the first transaction, you have $ 3,002, you've lost 85% of your account, it's terrible!. Meanwhile, if the only risk 2% per transaction, you're still $ 13,903 away you just lost 30% of their account.
Of course the last thing we want to mention the loss of 19 consecutive trading, but even if they lose 5 consecutive trading you look at the difference between risk 2% and 10%. If you risk 2%, you will still be $ 18,447. If you risk 10% you will only $ 13,122. This figure was smaller than the rest of you in case if you lose in all 19 deals with risk ratio is 2%.
The key to this example is you want to build the money management principles such as how to when you lose in a while you still have enough capital to continue the game. Can you imagine what would happen if you lose lose 85% of their account? You will have to earn 566% of the remaining capital account to be able to break even. Trust me, you will not want to fall into that situation where. Below is a chart that shows you the percentage that you have to get back to breakeven in proportion to your loss
You may find that you are losing more and more difficult the more you earn enough money to be spent. That's all the reason you need to make every effort to protect your account.
As such, we hope that you will always remember that you should only risk a small percentage of your account on each trade to exist after the transaction stages worst. Make sure that if there are unfortunately clause extremely difficult time, your account is still resilient enough to bounce back.
