|
Apply The NEW YOU……
and watch your newly developed discipline skills take positive effect on your trading results.
SOUND MONEY MANAGEMENT…..
is the missing link between trading failure and trading success.
With sound money management even the worst trading system can succeed. Without it, the best trading system won’t make you money.
A good money management system will define every aspect of the way you manage the funds in your account. It will define how many contract points to risk on any given trade. It will give you rules to set stops and when to enter and exit that trade and it will define the risk percentage that tells you how much your account can risk on a single trade.
If you follow the rules religiously, it makes it more difficult to let your emotions rule you. You also limit your risk to the point that you know that you can safely lose x number of trades in a row without jeopardizing your ability to continue trading
Your starting equity is called a trading float. To answer the question “How much should I start out with?”, you have to consider that you are starting a small business. This defines how fast you can grow the business (how much you can trade) and ultimately your potential for profit. This brings up 2 rules:
1. Never trade with money you can’t afford to lose. Even if you know your system is a sure-fire thing, this is the #1 one way to lose your entire account. Emotional trading is the quickest way to ensure failure. 2. Never trade with a float that is too small. With too little money you will be limited in trading systems that you can use, and you won’t be able to follow a decent money management system. Your first few losses will wipe you out. So you give up on that system and try another. A losing proposition all around. The minimum you should start out with is $50,000. If you can afford to start out with more, you should!
Once you have determined how much your float should be, then you have to concentrate on the risk you are willing to take on each trade.
DEFINING MAXIMUM RISK
When it comes to any type of trading, minimizing losses is really the only way to stay profitable. In other words, you have to stay in the game. If you look at 100 failed traders, 95% failed because they didn’t minimize their risks, and sticking with it. You must be disciplined.
Why Risk Only 1 – 2% per Trade?
Because no matter how good your system is, it is a statistical fact that you will have 10 losers in a row. It might be in 10 years, but at some point it will happen. That’s statistics for you and is guaranteed to take place. The lower your risk to capital the longer you can stay around and weather the storms the market throw at you. You must be patient with your trading and accept smaller safer returns rather than going for broke on your trades with the result that is inevitable. The important thing is long term success with low risk. Did you know that averaging only 6% per month starting with a $10,000 account will make you a millionaire in only a few short years?
If you minimize your losses, it makes it far easier to stay disciplined to your trading rules. And every trading system should include the following rules:
1. A method to determine the risk % of each trade, dependent on the size of your float. IE: the maximum you willing to lose on each trade. 2. The number of contracts to trade each trade which in turn is dependent on your changing equity balance. 3. An operating trading system with a strict set of stop, entry and exit rules with an allowance for a trailing stop
If you lose 75% of your float, you have to make a 300% profit. I promise you that you won’t be trading for long if you need to make up 300% every time you have a 3 loss streak.
So you need sufficient starting capital and you really need to be disciplined in reducing your % of risk on each trade.
If you set your risk % at 2% and your risk in points (your stop loss) to the minimum of your systems tolerance, you can then determine exactly how much you will lose per trade, and more importantly, as you increase the number of contracts per trade as your equity balance improves, you can guarantee that your maximum risk % loss of each trade will NOT EXCEED your initial estimate.
In other words, if your starting equity is $50,000, you are trading the emini s&p, and if your risk to equity is 1% and your stop loss is set at 4 points – you know that your maximum loss per contract is your stop loss (4 points) times $50.00 = $200.00. If your target exit is 10 points, then your profit will be 10 times $50 = $500. This is a 5 to 2 ratio and quite acceptable.
This ratio will remain the same with all subsequent trades while your maximum loss per trade will remain at 1% of your current equity balance – no matter how many contracts you trade.
With a loss of only 1% of your float per trade, you could go 50 trades before losing half your float. Not likely.
This fact alone should remove any stress or worry on your part and be a convincing argument that discipline in following ALL the rules is the best and only trading approach that allows you any chance of matching the results posted by the pro’s.
My web site has a ready-made spreadsheet called the “Futures Position Sizing Calculator” that automatically determines what ever risk % you want to set as well as the risk in contracts you are willing to assume. From this information, the program determines the number of contracts to trade per trade. Instructions are included. And it’s FREE.
If you got any value out of this report then you are ready to take the next step. All the trading systems have the built-in Futures Position Sizing Calculator. It automatically increases the number of contracts to trade per trade as your equity climbs. It also reduces the number of contracts to trade when the equity falls. I intend to adapt this calculator to all my systems in the future. .
Thanks for reading this far, and good luck.
|
