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The development of a trading system should primarily include two main models: the trading model and the Money management model. However, many novice traders tend to prioritize the development of the trading model over the Money management model. In my years of experience, I have found that the Money management model is actually the most critical component of a successful trading system. If we were to view the trading model as the crown, then the Money management model would be the jewel atop that crown.

The concept of trader training involves two key models: the trading model and the money management model. The trading model deals with the timing and manner of entering and exiting trades, while the money management model addresses the question of how much to invest in profitable trades and how much to risk on losing ones. In some cases, the shortcomings of the trading model can be supplemented by the technical advantages of the money management model, but not vice versa.
In the money management model, the allocation of trading samples is crucial, followed by the implementation of adding or reducing positions. Traders need to consider two aspects of sample allocation: sample size and sample quality. For instance, traders engaged in quantitative trading are familiar with the issue of sample size. If a trader trades heavily, with nearly 90% of their positions each time, and the potential loss for each trade is close to 10% of the initial capital, they risk a capital drawdown exceeding half of the initial capital after six consecutive losses. To turn a profit, they must first make up for their previous losses, a challenging process. The main reason for this is too few trading samples. Using a lower position size or smaller potential loss for each trade can expand the trading sample size, unleashing the potential of the trading model.
Regarding sample quality, traders must consider the trading situation of the trading model in different market scenarios. They need to define when to use an equal position size trading strategy and when to trigger adding or reducing positions.
The concept of Money management is both complex and profound, and much of the related research is academic, making it a rather dry subject. In this book, I can only briefly touch on this topic, keeping in mind the coherence and level of the readers. The truth is that significant differences in Money management models only become apparent when dealing with a certain level of funds. If you are managing only a few hundred thousand dollars, the costs of using a Money management model may outweigh the returns it generates.
To understand trading models, it is crucial to distinguish between trading and gambling. This is a profound issue, and some people regard trading as technical gambling, suggesting that there is no essential difference between the two. I completely agree with this view. However, it is worth exploring from a behavioral perspective.
Generally speaking, if a trader focuses on a few trading opportunities and invests all their capital into those trades, their behavior is closer to gambling. Conversely, if a trader focuses on multiple trading opportunities and spreads their capital across various trades, their behavior is closer to trading. For instance, if a trader puts all their positions on a single trading opportunity, they may witness high returns in a short period of time if the trade is successful. However, if the trade fails, the trader will lose all of their capital. In this scenario, the trader's behavior is gambling, not/>/>/>/>/>