A trader\'s money management system

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

98 A TRADER’S MONEY MANAGEMENT SYSTEM

to tell you when you are overtrading. For example if you have a

commission ratio of 90% you are giving 90 percent of your profits to the

broker. This means you want to make fewer trades while still making

the same profit—that way you get to keep more of your winnings. An-

other cause for high commission ratios is poor payoff ratios. For example

if 60 percent of your trades are winners you will have a more favorable

commission ratio than if 25 percent of your trades are winners.

Formula:

Commission ratio=Total commission paid÷Total Gross profit

To get a percentage, multiply the ratio by 100.

Example:

20%=$200÷$1000

Note: This formula is not applicable if your payoff ratio is less than 1 to 1.

If you are not generating a profit you can not calculate your commission

ratio.

CONSISTENT RETURN ON INVESTMENT

This chapter has been devoted to the importance of tracking your profit

and loss. These statistics will be valuable in determining what your ROI

is, and that is what this business, and every business, is all about. When

trading you are making an investment of your time and money in order to

obtain a consistent monetary return. The key is to ensure that your return

is just that—consistent. By implementing a money management plan, you

will increase your chances of maintaining a consistent profit margin in your

trading.