When you trade with Nadex or any other financial instrument, you must balance money management, risk/reward, a proven trading strategy, and the right trading mindset in order to achieve consistency. In this blog post, a simple plan for money management will be discussed.
The 5 Percent (or less) Rule
Many new traders get excited about the possibilities of Nadex, but don't know how to properly fund their trading account. Here's a simple rule: Never risk more than 5 percent of your account balance at any given time. If you are entering a trade risking $50 to make $50, then your account balance should be $1,000 since $50 is 5 percent of that balance. If you routinely risk $80 to make $20 on much higher probability trades, then a $1,600 account balance is preferable. Here is why the 5 Percent Rule can be helpful for managing your Nadex trading account:
- Risking 5 percent (or less) of your account balance on a high probability trade will greatly improve your trading psychology. If you have 5 percent (or less) of your small trading account at risk, you can trade with better confidence. You have discovered and personally tested a strategy with better than a 70% probability of success. You know it's likely that 7 out of 10 of your trades will be successful. If you risk less than 5 percent of your account balance on a high probability trade, then you are in control of your emotions.
- Risking more than 5 percent of your account balance can negatively affect your trading psychology. If you have a $400 account balance and you place a trade risking $80 to make $20, then you have 20 percent of your account balance at risk for a 5 percent return. Even though it's a high probability trade, there is still a 20 percent chance that the trade will expire out of the money. So you hunch forward, babysit the trade and you are quick to exit if the trade looks like it's turning against you. You feel emotionally drained even if your trade expires in the money. If you placed the same trade with a $1,600 account balance, it's likely that you would be in a relaxed mindset making the trade.
- If you don't have the funds to meet the 5 percent rule, then practice in demo and make gradual deposits into your account until it is adequately funded. The first couple of months trading Nadex should be heavily devoted to research and education. If you have just funded your Nadex account with $100, it might be a good idea to invest in self-education and test a high probability strategy in demo at least 40 times. For a checklist on how to do this, click here. In the meantime, if you have decided that your strategy requires $50 risk per trade, then you may want to raise another $900 before you start trading live. If your chosen strategy requires an $80 per contract risk, then try to raise more money.
- They have learned how to manage money on every trade
- They have a proven high probability trading strategy that they can do in their sleep
- They know how to manage risk/reward vs. probability of success
- Their accounts are adequately funded to deploy their strategy
The Purpose of this Blog
The opinions expressed in this blog are solely those of the author, and should not be construed as trading advice. I am not a registered or certified financial planner. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. All individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.