A trader\'s money management system

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

Using the Two Percent Risk Formula and Proper Trade Size Formula 87

FIGURE 10.1 Illustration of the Trade Size Calculator Determining Proper Trade

Size.

Source:eSignal.www.eSignal.com

You can manually determine the proper trade size using the formula in

this chapter, but as you can see, it is quick and easy to use the calculator.

Be sure to use your free 30-trial of the software, and go to Appendix A to

see how to download your software from the TradersCoach. com Web site.

TRADE SIZE AND RISK PSYCHOLOGY

When someone makes a killing in the market on a relatively small or av-

erage trading account, this trader most likely was not implementing sound

money management and had not developed a healthy risk psychology.

In cases such as this, the trader is more than likely exposed to ob-

scene risk because of an abnormally large trade size, possibly using margin

and leverage. In this case, the trader—or gambler—may have gotten lucky,

which led to a profit windfall. If the trader continues trading in this way,

the risk-of-ruin (ROR) probabilities suggest that it is just a matter of time

before huge losses will dwarf the wins.

When someone tells me that he or she trades the exact same number

of shares or contracts on every trade, I know that trader is not calculating

the optimal trade size. Otherwise, the trade size would change from time

to time to reflect changing market dynamics.