Before you read the money management section of the trading FAQ, it helps to remember that there are many different trading styles. The formula that I have generally given of "you won't win often, but you'll probably lose a lot, so to succeed maximise your winnings when you can" is a common one and probably the best way to go for most traders, but it isn't the only way.

If you were trading options in a way that capitalises on "time decay", you would expect to win often, but not win much. Many new options traders figure that the occasional thousand percent win will be enough to compensate for all the losses on their trades when the things expire worthless, but for most options traders the reality is that this is the death of a thousand cuts. You will draw down so severely on your capital (after commissions are taken into account) that you will in all probability have great difficulty climbing out of your hole even when you do finally get a big win.

The majority of options traders make money selling options instead of necessarily buying them, capitalising on the tendency for the majority of options to expire worthless. They write options, taking a steady income stream for months or weeks at a time, every now and then taking a massive loss on a trade. This is actually a perfectly valid way to trade, just that it requires a different style of money management to typical share trading on the long side.

This is in fact the sort of trading that most major institutional trading desks use. They write hundreds of options, pocketing the premium on maybe 95 of them, taking a bath on the other 5%. It is the sort of profit you'll make from arbitrage, trading as a stock specialist on the "bid/ask" spread or various other strategies involving derivatives.

These sorts of trading styles tend to be very complicated and mathematical. You need to be very familiar with option pricing models and it would help if you had a knack for advanced mathematics, even if you do generally use a computer to do the number crunching. If you open up a good book on options you will be confronted by page after page of mathematics. If you are wondering why this is necessary it probably means you've never really traded options. It all relies on knowing how derivative markets respond to volatility and news, going net long on options when volatility looks like increasing and going net short when it may fall.

Many of these strategies are market neutral, which is a way of saying that they are designed to make money no matter which direction the market goes, so long as you have some idea about how far it may go. I strongly encourage anyone thinking of trading to do some serious research into option trading. Even if you find that it is all too complicated for you, it will probably be a good, sobering entry into the world of professional trading, and help you to realise that there is more to trading than liars on Usenet talking about what a killing they are always making with their technical analysis.

If you trade futures, leverage will have such an effect that a strategy that works well on stocks could see you over-commit on futures positions. Now a trading system should usually be sufficiently robust that it will work on most markets, but the addition of leverage and easy short selling adds new dimensions to trading. You'll need to take this into account before you think that a trading style that works well in one market should apply equally well to others.

The section to follow talks about money management techniques in greater detail. You will see that some of them depend on your wins being huge versus your losses, while others rely on you being right a lot. Even if you don't use them in a mathematically exact way, it would be very useful for you to know what sorts of money management strategies are designed to work with your system.

After you've traded for a while, hopefully keeping your trade size small at first so you still have capital available when you've done your analysis (or autopsy maybe), you'll know what sort of statistics your trading style produces. This is one good reason why many gurus tell you to stick with your system and not change it on a whim. You need to understand not just the market, but yourself. Your method is part of you, it comes from your educational background and your psychology. What you have learned from trading books and sites and courses will play a part, but so will your ability to apply that knowledge.

Analyse your own trading. Keep a journal of your trades and write down why you took each trade. Right down the profit you made or the loss you made, and write down what went wrong. This is very important because it will provide important insights into your method.

As I've said before, I am sceptical of technical analysis. I don't say nobody should use it, because it gives a very useful framework for you to apply your ideas. I sometimes use Elliott Wave, believe it or not, and while many would find me nuts for doing this and laugh at such naivete, I do find that in an Elliott Wave context I can "understand" the market a bit better, and it does help me arrange my thoughts. Being right or wrong on the forecast doesn't matter much, because money management and risk management keep me from coming to grief, even if you think Elliott Wave is no better than coin flipping that makes it roughly as effective as any other system yet devised. If I found I was usually wrong I would go contrarian to an EW forecast (so far I've done alright). Nevertheless by sticking to an approach, you get an idea of how the market works, as seen through your own tinted glasses, whether they are rose coloured or otherwise. You also get some idea of how good it is for trading.

Armed with many months or years of trading statistics, (your trading statistics, not a computer backtest, unless you seriously plan to follow your system mechanically), you'll know your average win size, how often you win, the number of times in a row you are wrong before you are right, or the number of back-to-back winners.

Now there is no guarantee that your approach will always work in the same way and produce the same stats, but barring a fundamental paradigm shift in the ways markets work your statistics may have some worth.

From there you will know if your method is one that leads itself to increasing your trade size whenever you are in a trade that is going well, or reducing your position as the market moves your way. You should know if a single winning trade tends to lead to a string of them or if they are fairly evenly spread out. As you read the following section, bear in mind the characteristics of your trading style when thinking about what sorts of money management techniques and risk management techniques will work for you. There is no guarantee that they will work, (of course), but detailed self-contemplation is the only real tool you have against a chaotic system like the market.