You hear this repeated a lot in the trading forums and from many free articles on trading: That money management is everything in trading. That risk control is everything in trading the markets. That money management is the secret between trading success and failure.
Money management is a sizable component of a successful trader. But it is not the only component. Money management alone will not make you a trading success.
For trading success, you also need to have a trading edge. You need to have a trading system that works.
For if your trading system does not have edge, then you are still going to lose money, no matter how perfect or effective your money management skills are.
The reason everyone on the forums and internet is constantly praising money management and risk control is because the majority of traders starting out want to risk an extraordinary amount per trade and are going to blow their accounts. In order to help those traders, it is not about making money. For the traders constantly blowing their trading account they need to first learn how to take small losses instead of blowing up their accounts. And thus the constant preaching of money management, risk control, and only risking a small amount per trade until you finally understand your trading platform, the markets, and how to trade a system.
And money management and risk control are very key components in helping to keep you into the game. Aspiring traders are not going to give themselves enough time to learn trading if they keep blowing up trading account after trading account. They will think the game is too hard or that the markets are rigged against them.
On the other hand if they only took small losses and are down 5 or 10% instead of being down 50%, well then in that case they may give trading some more time as they see potential if they can just turn around the small losses.
Poor Trading System
A poor trading system with absolutely no edge combined with perfect money management will still result in substantial trading losses. You just won’t blow your account like some other gamblers out there. If you risk 0.25% per trade with a poor trading system, you will still lose money, a lot of money if you keep trading this system in the long run.
When you keep taking consecutive losses after consecutive losses and when you do have winners that are extremely small, then that system is not going to generate profits for you.
Either you need a trading system with respectable winrates above 50% with high or low reward risk ratio of at least 1:1.
Or you choose a system with low win rates below 50% and have trading winners with extremely high reward risk ratio.
A poor trading system with very low win rates coupled with low reward risk ratio is doomed to failure.
Mediocre Trading System
A mediocre trading system, with no edge, but still has a few decent winners mixed in combined with perfect money management will still result in small trading losses.
I know I had a mediocre trading system that gave a few nice winners here and there, but some consecutive losses came. I had good money management, which kept the losses under control, but they were still whittling away at my account. I was still taking losses, just very small. But it was certainly not the type of profit that I wanted.
Eventually there came a point where I was wondering what was wrong with my trading. Was it my money management? Was it my trading system? My trading psychology?
In the beginning and for a while I thought the problem was my money management. After all, the gurus on the forums keep telling you it is the money management. “It’s all in the money management” they say.
And I believed them for a long time. Didn’t make that much progress to turning around my trading.
Eventually I figured out that the problem wasn’t really in the money management. The problem was in my trading system. My trading system stinked. I had to find a better trading system that either gave me higher winrates with respectable reward risk ratio, or gave me bigger winners.
And finally that is when I discovered order flow trading, which is as close to the best system available for discretionary traders that exists.
The big trading breakthroughs come when you have a trading system that has a huge edge.
Because a trading system that has a big edge, combined with mediocre money management will still generate some very good profit.
At that point, after you have established a killer trading edge is where you can have the time, money, and freedom to focus on perfecting your money management skills. That development of good money management skills and control of trading emotions combined with a killer trading edge is what will propel you to new profit heights.
But do not fool yourself. Perfect money managemant and trader psychology is absolutely no substitute for a good trading system.
You have to have a trading system with an edge in order to make money.
In fact, it was when I had a trading system with a killer edge, that it can me the confidence and motivation to tackle the money management and psychology issues further. I talk about it in my order flow breakthroughs article.Because at that point, you already know you have a big trading edge and want to perfect it further. You cannot perfect the trading edge anymore, so then you focus on money management and trader psychology.
For if you are a trader that has great money management, always risks a small amount, knows how to position size, is in control of your emotions, does not revenge trade, and follows your system, then you do not need any better money management to reach a new level of trading success. You need a better trading system.
Knowing that you have a great trading system with insane potential is one of the best ways to give you the motivation to continue the trading journey.
Attain the order flow edge.
There are all sorts of aspiring traders that believe they can enter the markets with great money management and turn a profit. When in reality they need evidence that they have a trading edge.
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