I often meet up with many trader friends and the most common question i have is how to make consistent monthly income.

Common, isn’t it?

Who wouldn’t want to make an extra dollar or two per month, right? And i fully understand that.

Well, making consistent monthly income from trading is an art. There’s no right or wrong answer but just a matter of strategy with proper money management. Both strategy and money management work the best in pair and there’s no way for them to work independently. Lack of either one is committing suicide in the stock market.

Don’t believe? Test it out yourself and see.

Trading is just a number game and in order to generate consistent income, appropriate stop loss play an important role. I myself do have losing trade but what makes me still stand out as a nett winner at the end of the month? Simple, it’s money management.

My definition for money management is cut your loss short. That’s all and that’s it. I don’t need to give you a “exam” type of answer for you to understand it.

For e.g., say if you have a total of $5 capital and want to diverse the risk by entering into 10 trades with $0.50 each trade. Safe strategy isn’t it?

Well, let’s drill in further. Say both A and B are deploying the same strategy with the same profit target of 100% but A used stop loss of 20% while B simply didn’t.

Let’s assume out of the 10 trades, only 4 are winning trades.

After tabulation it is obvious that B, who has no money management, incurred a nett loss of $1

On the other hand, A, who placed every trade with a stop loss of 20% which equal to $0.10 per trade, comes out as a big winner although the success rate is only 40%. Let’s see how much he made.

Out of the 6 losses he had, he incurred a total loss of $0.60 where the winning trade gave him a total gain of $2. Wow, a nett gain of $1.40 as compared to B. It’s remarkable, isn’t it? 4 out of 10 win still manage to grow your portfolio by 28%.

And that’s the beauty of money management.

Well, although it’s simple but really, many traders out there still do not have any money management in place and that is truly disheartening.

So, in order for you to trade for long term, money management comes on top of every single strategy, even though it’s a sure win strategy.

Do take note of that.

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