A trader\'s money management system

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c11 JWBK182-McDowell April 25, 2008 16:14 Printer: Yet to come

96 A TRADER’S MONEY MANAGEMENT SYSTEM

As an analogy we can look at our trading vitals in the same way that a doctor

looks at our medical vitals. As an illustration, let’s list some vital statistics that

are commonly used in medicine:

1.Blood pressure

2.Weight and height

3.Temperature

4.Medical history

5.Oxygen level in the blood

6.Cholesterol

7.Current symptoms

8.Family medical history

9.Age

10. Surgical history

Many of these medical vitals are similar to our trading vitals. For example,

your trading history can help predict your future trading patterns. Your trad-

ing temperature is a quick barometer to let you know if your current trading

temperature is normal—are you 98.6?

Your current trading symptoms will help you determine what to prescribe.

If your payoff ratio is high but your percent of wins to losses is low, you know

that you want to prescribe a plan to increase your wins to losses. This is valuable

analysis, and it will be instrumental in boosting your profits.

FORMULAS FOR SUCCESS

The three important vital statistic ratios you will need to calculate are:

1.Win ratio

2.Payoff ratio

3.Commission ratio

These ratios tell you your current standing on a variety of levels and

will give you guidance on how to move forward. Use the following formulas

to calculate your vital statistics.