Money management and Discipline


I personally do not see how one could get ‘edge’ with trading system in markets. But I believe this is a matter of definition. My opinion is that all edges come from money management and self-control/discipline. You cannot control the markets, but you can control yourself.

My initial statement is:
You can take almost any trading system and make it profitable with proper money management and discipline. Now this is assuming that definitions are as follow:

Trading plan
Trading system + money management plan + scheduling + ect.

Trading system
Your entry and exit strategy (be it MACD crossover, PA or MA crossover or anything else). Also this includes the way you handle your trades when you have open positions.
My definition is simplistic, because I believe that all the other things fall into money management category.

Money management
How much you are willing to risk per trade and how much you require your expected reward to be in contrast to risk you take. Often you hear good money management plan is to only risk 2 % per trade and only take trades, which you can reasonably expect to give you reward that is at least two-times your risk (RRR).

I define discipline in trading to follow your trading plan (see above) with pinpoint accuracy without deviating from it. This includes not letting your emotions (fear, greed ect) take control and affect your trading.


BUT, in real life trading on real life markets, there are always people willing to bet against you and you CAN affect your win-loss-BE –probabilities with your trading system. You just have to be disciplined enough not to take any other trades. You might also consider requiring 2:1 reward-risk ratio as trading system edge, but I consider it as money management parameter. Of course this example assumes that on AVERAGE your profit is 4 % of equity and loss is 2 % of equity. In practice you will have bigger and smaller losers and winners.

I think money management plan and discipline are so important for trader. Money management plan is what determines long term profitability and the plan is only good if you have discipline to follow it.