Traders tend to focus most of their efforts on developing and testing trading strategies, often overlooking the fact that even potentially profitable entry and exit rules may end up losing money because of inappropriate risk and money management.

Moreover, system developers sometimes attempt to weave complicated risk and money management rules into their trading methods, ignoring another, perhaps less understood fact: Such rules must be treated as an integral part of the trading system during back–testing to ensure that historical performance results reflect real trading potential.

A common mistake made by new trading system developers is to attempt to increase or maximize equity growth of a historical test by adding to open positions or increasing a new position size using the system’s profits. Obviously, this works well for a system with positive historical equity growth, but real–life performance can be disastrous if the trading system does not behave as it did in back–testing.