c17 JWBT016-Busby September 30, 2008 14:43 Printer: TBD
Risk Management 167PEARL 27
Never risk too much with any trade. No trade is worth losing more than 10
percent of your account balance.Electronic trading platforms offer many advantages over phoning or-
ders to a broker. With electronic exchanges a trade can be quickly exe-
cuted, and in seconds, or split seconds, it is possible to know if the order
was filled and at what price. By trading electronically, you are able to have
much greater control over many aspects of the trade. However, there are
some drawbacks to the new technology. It is easy to become separated
from your money. Suddenly, the cash in the trading account does not feel
real. It is just a group of numbers at the bottom of a trading platform. So
what if $500 or $1000 are lost today? You can make up all of that money
and more tomorrow. Then, day after day, the losses mount and the ac-
count balance drops. Reality finally hits home when a margin call comes
from the broker. Never become separated from your money! Every dollar
that is lost is important. Make wise decisions and be sure the odds are on
your side before you click that mouse and make any trading decision.Phasing Into and Out of Positions
Another way to manage risk is to phase into and out of positions. I do this
with all of my trades. I trade in multiples of three. That is, I generally buy 3,
6, 9, 30, and so on, contracts. In that way I am able to take profit at various
levels and reduce the risk associated with the trade. If I have six contracts, I
will liquidate two of them with a few ticks of profit. That action puts a little
cash into my account and reduces my exposure. As the market moves in my
favor, I liquidate another two contracts with more profit. Now my profits
from the trade are increasing and my risk is decreasing. I have only two
contracts at risk in the market, and I have already made money to cover
the potential loss that I may suffer on those contracts. I move my stop/loss
up to a breakeven level. Now I am trading with the market’s money. I have
taken enough money out of the market to pay for my trade. This is an ideal
position to be in because I can liquidate the position whenever I want and
not lose a penny. I can take profits or hold them to follow a longer trend. I
am in the driver’s seat and I can hold ’em or fold ’em when I choose.
Years ago, I used an all-or-nothing strategy. I was greedy and tried
to ride all of my positions for maximum profits. I took an all-or-nothing
approach, and many times I got nothing. Now I moderate my greed and
take profits at various profit levels. I do not want to give the market the