A trader\'s money management system

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c12 JWBK182-McDowell April 25, 2008 16:15 Printer: Yet to come

110 A TRADER’S MONEY MANAGEMENT SYSTEM

We can also learn from the most unprofitable month by looking at

weaknesses that can be worked on and improved. Here’s a quick analysis

of the month of June:

Win ratio is in dangerous territory: 24 percent wins to 76 percent losses

make it virtually impossible to come out ahead. This period certainly

would be considered a drawdown period, and we can use the history

to anticipate future drawdown activity.


Payoff ratio is $1.80. This would be an adequate ratio if the win ratio

were higher.


Average win and loss figures are too close to each other in value, again

not a disaster if the win ratio had been higher.


Loss on the trading account is 12 percent for this month, significant

and important to analyze to determine if there were any trading errors

that could be identified and avoided in the future.

It is important to compare your strong trading periods with your weak

trading periods to identify valuable insights and observations.

WEEKLY TRADE LEDGER EXAMPLES

We’re closing in on the micro level of the analysis to the point where we

get to look at actual emotions and trading psychology and how that also

plays into the numbers in a very real way. As before we’ll look at two

examples of my student’s trade ledgers; one is a profitable week and one

is a losing week.

Weekly Trade Ledger for January 22, 2007,

2 Percent Loss

The first week is from January 22, and shows a net loss of $620.14 (see

Figure 12.4). Let’s take a look at this week’s vital statistics:

1.Win ratio: 25 percent

2.Payoff ratio: 77 cents win for every $1 lost

3.Commission ratio: N/A

4.Largest winning trade: $1,761.90

5.Largest losing trade: ($475.86)

6.Average winning trade: $701

7.Average losing trade: $303

8.This week’s profit/loss on trading account: 2 percent loss for the week