Capital management methods and principles for contract trading.

After entering the cryptocurrency space with 8000, suffering a loss of 8 million due to contract liquidation, and then reinvesting 200,000 into the cryptocurrency market, I managed to achieve 20 million in two years. The core formula for my recovery and wealth freedom in the cryptocurrency space is: (methods and principles of trading capital management). I will share them with everyone in hopes they help you on your trading journey!

Trading is like running a business; capital management is a key factor that can determine survival. Stability should be your primary consideration. Traditionally, capital management generally includes issues of profit-loss ratios for individual trades, overall trading risk levels, and issues concerning adding positions and exiting during the trading process. We can summarize it into a few points: 1. Combination: Investment direction 2. Position: Amount invested 3. Timing: When to enter and exit.

Trading is like running a business; capital management is a key factor that can determine survival. Stability should be your primary consideration. Traditionally, capital management generally includes issues of profit-loss ratios for individual trades, overall trading risk levels, and issues concerning adding positions and exiting during the trading process. We can summarize it into a few points:

  1. Combination: Investment direction

  2. Position: Amount invested

  3. Timing: When to enter and exit

Question: Is it related to the small capital scale that trading yields no results?

Answer: The size of trading capital is not necessarily related to whether you are a successful trader. Many people cannot even manage a small account well, so why would they think they can manage a large account? Different sizes of accounts require different strategies and operating methods, and many people struggle with small capital accounts mainly due to improper methods.

Large Capital Accounts: Have a stronger ability to withstand drawdowns, can set wider stop losses, but once triggered, the losses can be significant; larger profit potential with longer return cycles; more suitable for trend trading.

Small Capital Accounts: Have a weaker ability to withstand drawdowns, with limited space for setting stop losses, generally close to the current price, leading to relatively small absolute losses and shorter profit cycles. Quick returns can provide emotional satisfaction to traders, making it more suitable for swing trading.

In summary, based on the characteristics of large and small capital accounts, large capital is more suitable for major trends while small capital is more suitable for swing trading.

Question: Most people have small capital accounts; can you introduce management methods more suitable for small capital accounts?

Answer: If you want a small capital account to grow quickly in a short time, you may need to pay attention to the following issues:

1. Survival first. Regardless of account size, this is the primary principle.

2. Only engage in short-term swing trading. The biggest disadvantage of small capital accounts is their weak resistance to drawdowns. Even a slight larger drawdown may lead to liquidation. Therefore, it is best to focus solely on intraday short trades.

3. Regardless of profit or loss, limit the number of trades you make each day. Ideally, do not exceed three trades per trading day. If the first two trades hit stop losses, it is best not to continue trading to avoid being influenced by mental state. Additionally, take profits in a timely manner; do not continue trading just because all three trades of the day were profitable.

4. Focus on only one variety at a time. For small capital accounts, there's no need to think about diversified investments; it's unrealistic. Since the account funds are already limited, trading multiple varieties simultaneously will only reduce your risk tolerance, potentially leading to greater losses.

5. Be adept at seizing major opportunities. Small accounts need to grow their capital; relying on small daily profits takes a long time, similar to the previously mentioned compound interest model. Therefore, small accounts must grow quickly by seizing opportunities, capturing a big opportunity every so often, and patiently waiting for the next opportunity. This can also be understood as winning with quality rather than quantity of trades.

6. Increase position size, be bold yet meticulous. I have told everyone many times not to go heavy. However, if you want to rely on a small amount of capital to obtain huge profits in speculative trading, you must dare to go heavy. If you want a small capital account to grow quickly, you need to increase positions while seizing opportunities. At this time, do not fear heavy positions, and do not equate heavy positions with liquidation. The core reason most people experience liquidation is not due to being over-leveraged but rather entering positions too easily, frequently stopping losses, or not stopping losses at all.

Once a student asked me what is the most important aspect of investing? I answered with four words: capital management. My answer surprised my students, as being someone who studies trends and technical analysis, most would assume I would say the most important thing is to grasp trends and trade with the trend.

For someone to become an excellent investor, capital management is crucial; I call it the lifeline of investment.

I. The Importance of Capital Management

Many people are searching for secrets to profit in the market, believing that accurately judging market direction will lead to stable long-term victories. However, the most important aspect of consistently profiting in the market is capital management.

Warren Buffett believes that safety is the first principle of investing: 'The first rule is to preserve capital, the second rule is to preserve capital, and the third rule is to remember the first two rules.'

George Soros said: I crave survival and do not wish to take catastrophic risks. If we do not understand how to stop losses, we head toward destruction.

Larry Williams stated: Capital management is the most important secret in my investment life; nothing else is more important.

Many investment masters and trading experts do not have a high success rate but can continuously earn profits because they are better at grasping trends and capital management. Effective capital management strategies allow investors to gain substantial profits in major trends and movements without increasing risks.

It can be said that all successful investors excel in capital management, while those who perform poorly, even to the point of bankruptcy, ultimately have failed in capital management. Many excellent individuals fall due to neglecting capital management.

Financial trading, despite its enormous risks, does not mean you cannot go heavy or fully invested. Instead, it must be done under risk control, gradually accumulating positions as the market trend continues until fully invested. Only in this way can risk be minimized and profit maximized. This is the essence of capital management.

II. The Concept of Capital Management

What is capital management? To put it simply, it means using reasonable capital investment and strict risk control to minimize financial risk and maintain a stable state of investment, which is called a good capital management model.

Under an excellent capital management model, the pursuit is for long-term stable profits, seeking joyful, easy, and happy investments rather than short-term windfalls. The pursuit of short-term windfalls corresponds to the risk of liquidation. As long as you harbor thoughts of obtaining huge profits, you will inevitably experience liquidation and the accompanying fear and anxiety, even nightmares. Everything has two sides; what kind of prosperity corresponds to what kind of adversity. Steady and gradual investment methods correspond to long-lasting and stable, safe profits because a steady investment approach bears low risk. In high-risk, high-leverage investment fields, ensuring your long-term survival is the true path, the fundamental principle.

III. Methods of Capital Management

1. Start with light positions, entering in batches;

2. Hold positions in the direction of the trend and increase stake when profitable;

3. Set stop-loss levels to limit losses;

4. Allow profits to grow sufficiently while keeping losses to a minimum;

5. Do not increase positions against the trend, buying more as prices fall in an attempt to lower costs.

IV. Characteristics of Great Traders

First, the funds used for investment should not be money you need for survival; they should be funds that do not affect your life after a loss. This is the first step in capital management.

Second, decisively increase positions when the trend is clear to expand profits. However, I must emphasize that the most important aspect of increasing positions is moderation, ensuring it does not violate the basic principles of capital management.

Third, do not be greedy. Even in a clear trend, when adding positions, you must consider the adverse impact that a sudden reversal may have on the total capital, which is crucial.

The key to effective capital management is overcoming greed. Only by overcoming greed can one better avoid the omnipresent risks, make rational decisions, and let operations follow reason and wisdom rather than desires or imaginations. When desire burns and imagination ignites, wisdom turns to ash, leaving no room for rationality.

I have previously mentored many students in trading. Many started trading at the same time, using the same methods and plans. After a period, some lost money while others made profits, showing a significant gap. The main difference lies in capital management: lighter positions when making profits and heavier positions when incurring losses; running fast when in profit, slow when in loss, and so on. I often encounter individuals who hold onto losing positions, refusing to admit mistakes, holding until liquidation or significant losses occur.

I want to remind you that when investing, you cannot always fantasize about making huge profits. This is the most fatal flaw in the investment process and a common mistake many people make. If a general leading troops always fantasizes about being promoted after achieving a glorious victory, it would be quite terrifying.

Therefore, we must stay away from fantasies and think calmly. Consider what opponents are thinking, what the market is thinking, what large investors are thinking, and what ordinary retail investors are doing. Whether you are investing in physical industries or in leveraged cryptocurrency markets, you must pay attention to these factors, and think from these aspects. Especially in leveraged foreign exchange and futures investments, which are zero-sum games, the money you lose is precisely someone else's profit, and your profit is someone else's loss. Every market participant wants to make money. In this scenario, you must not only consider what you should do but also what others will do, what choices they will make. Moreover, your thinking must be serious and in-depth. Only after seeing through the other party and the market can you act, which will allow you to be comprehensive and ultimately succeed.

Basic Principles to Follow in Capital Management

First Principle: Control Position Size.

Always maintain light positions, never go heavy, especially in leveraged markets. You must have a scientific position management plan and strictly adhere to it.

My capital management method includes volatility, such as the 'number of lots to buy' and 'average volatility' I provided in the morning analysis. The calculated number of lots takes into account the normal fluctuation range of the variety, and strict adherence to this amount generally avoids erroneous stop losses.

The second principle: Ensure good risk control.

1. Start with position control, keeping risk managed from the source.

2. Reduce positions, or even go to cash, before major risk events.

3. Treat capital as paramount; if capital drawdown reaches a certain percentage, liquidate unconditionally.

Many people do not truly understand what investment is. So, what is investment? Investment is essentially a game of avoiding traps while searching for treasures. The premise of treasure hunting is to avoid traps; only after effectively avoiding traps can one successfully find treasures. Over 95% of investors fail to understand this principle, focusing solely on treasures while neglecting the traps, leading to their downfall in the pursuit of treasure.

Everyone must remember a principle: the importance of survival is always greater than the importance of profit. In other words, those who can ensure their safety and significantly enhance their survival ability will ultimately achieve very considerable returns on their investments.

For those engaging in high-leverage investments, you should at least allow yourself 10-20 opportunities to withstand significant risks, meaning you can sustain 10-20 losses without liquidation. Therefore, divide the funds into 10-20 parts, using only one part for investment while keeping the rest as risk-prepared funds or risk-control funds. Even if you have divided funds into several parts, you must wait for a particularly clear trend or significant market movements before entering.

In our investments, dividing capital into 10-20 parts may mean a decline in short-term profit capacity. However, due to greatly reduced risk, you then possess the ability for long-term profitability.

Giving roses to others leaves a lingering fragrance in your hand. Thank you for your likes, follows, and shares! Wishing everyone financial freedom by 2025.