Bankroll Management - Part 1

To most beginners bankroll management won’t seem like one of the most important aspects of trading but to become a profitable trader it’s a must. The purpose of bankroll management is to stop you going broke or to stop you losing your trading bankroll. It’s fair to say that if you only have enough money in your trading bankroll to cover 2 or 3 losses then the odds are in favour of you going broke.

What is a bankroll?
A trading bankroll is the amount of money you have set aside specifically for trading. This should be money you can afford to lose, don’t go throwing in this months rent money or the cash you’ve been saving for that holiday or even the money you use to hit the town with every Saturday night. The trading bankroll should consist of trading money and trading money only.

The aim of trading is to make money by constantly making profitable trades or having more winning trades than losing trades. If you can master the skills needed to be a profitable trader and trade within your set limits then your bankroll should begin to grow. Successful bankroll management involves increasing trading limits as your bankroll grows but having the discipline to decrease your limits to stay within the comfort zone of a well managed bankroll should you have a bad run.

A good rule of thumb is to never risk more than 5% of your bankroll on anyone trade.

Bankroll basics
- Never have more than 5% of your bankroll at risk in anyone trade.
- Never have more than 2% of your bankroll exposed to high volatile products.
- If an open position represents more than 10% of your bankroll cash in and start working on your next trade. (dependent upon strategy)