A trader\'s money management system

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c10 JWBK182-McDowell April 25, 2008 16:11 Printer: Yet to come

86 A TRADER’S MONEY MANAGEMENT SYSTEM

For example, if we entered an IBM stock trade at $91.49 and our ini-

tial stop-loss exit is set at $90.23, then our maximum trade size would

be 753 shares based on an account size of $50,000, a commission cost of

$51.22 using 150 percent margin. Our actual dollar margin amount would

be $18,891.97, but our risk on the trade, if stopped out, would be $1,000, or

2 percent of $50,000. Here, we are using margin while keeping the trade

risk within 2 percent.

USING THE TRADE SIZE CALCULATOR

You can certainly do manual handwritten calculations for the formulas pre-

sented here, but I developed some simple software that makes it easier and

faster to make these calculations during the trading day. It’s called theTrade

Size CalculatorTMand a free 30-day trial of the software comes with the pur-

chase of this book. Take a look at Figure 10.1 to see an illustration of how the

calculator is used. Then you can refer to Appendix A for all the information on

how to download your free trial of the software from the TradersCoach.com

Web site.

TRADE SIZE CALCULATOR EXAMPLE

Take a look at Figure 10.1 to see an example of using the Trade Size Cal-

culator software to determine your trade size. Here you will see that the

specifics of the trade are as follows:


Account size=$50,000


Percent of capital at risk=2 percent


Trade entry price=$26.89


Initial trade exit price=$25.45


Risk amount per share=$1.54


Commission=$10 round trip

On Figure 10.1 you can see that the risk amount is the distance between

the trade entry price and the initial stop-loss exit price. That amount of risk

comes to $1.54 per share and is indicated by an arrow pointing to the entry

and arrow pointing to the initial stop-loss exit. After entering the specifics

of the trade into the calculator, you see the following results:


Maximum trade size=642 shares


Dollar risk=$998.68