I am constantly amazed by the fact that many intelligent and experienced traders, armed with good trading strategies, often overlook, disregard, or be little the importance of good money management in trading. In recent months, some of them have sustained huge losses because of this oversight.
Good money management is about optimizing the sizes of our trades, so that we can effectively control the risk exposure of our trading accounts. This is how we limit our losses when the trading strategy gives us losing trades (which will happen, sometimes even consecutively!)
In view of this, a myth often quoted among traders who emphasize the importance of money management is that “even a bad trading strategy can make money with good money management”. People who subscribe to this statement essentially downplay the importance of a good trading method and excessively attribute trading success to good money management.
The truth of the matter is that if you don’t have a good trading method that gives you an edge over other market participants, good money management will not make you profitable; all it will do for you is to ensure you lose money more “systematically” and slowly!
Without an edge over the market, you’re just like a gambler visiting a casino, where the house always has an edge (a mathematical advantage) over you. In such a scenario, the longer you stay in the market, the more certain it is that you will lose all your money eventually. In fact, if you don’t have a method that gives you an edge, the only way you could make money is to practise extremely bad money management, i.e. by putting all your stakes on one or a few trades, hoping that “luck” would strike in your favor for a very brief period of time and make you profit big-time, and then leaving the market immediately thereafter! (This is essentially what all gamblers are pinning their futile hopes on!)
The right way to understand the role of good money management is seen in a slight variation of the first statement: “Even a good trading strategy can lose money with bad money management”.
To win consistently in the market, we need
1) A method that gives you an edge (an advantage) over the market
2) Good money management to limit your risk when there are losing trades
3) Discipline and good emotional control to implement the above despite the often unnerving market fluctuations