A trader\'s money management system

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

112 A TRADER’S MONEY MANAGEMENT SYSTEM

This weekly ledger is interesting in that it occurs at the end of a very

profitable month of the year we are using as an example, which is the

month of January. Here are some observations on the trading psychology

and the performance that unfolded during this week:

At the bottom of this ledger in the notes section, my student com-

mented: “Mixed week: I only had 3 wins; frustration was on the last

day with four losses in a row”...


What is interesting about capturing this insight into his feelings is that

this was a fabulously successful month, and the week in this example

posted a loss of only $620, which, when looked at in perspective, is

relatively small.


Considering that January was the first month of trading and success

seemed to come quickly, the question is, was there some discomfort

with the success coming right away?


Yes, the win ratio and payoff ratio are dismal for this week, but for an

isolated week it is a manageable setback.


Looking at the following two months, February and March, there is a

small loss posted, but then the month of April is back on track.


These are normal cycles of trading, and to become accustomed to ups

and downs creates an advantage for you and your trading psychology.

Weekly Trade Ledger for July 23, 2007,

9 Percent Gain

The next weekly ledger (see Figure 12.5) we are going to look at follows a

significant drawdown period that took place in June and July. Let’s look at

the eight vital statistics for the week of July 23, 2007:

1.Win ratio: 80 percent

2.Payoff ratio: $2.21

3.Commission ratio: 1%

4.Largest winning trade: $992.76

5.Largest losing trade: ($291.12)

6.Average winning trade: $643.67

7.Average losing trade: ($291.12)

8.This week’s profit/loss on trading account: 9 percent profit

This was a terrific week—the most profitable week of the year. Again,

it follows a severe drawdown period that was psychologically difficult.

Having the continuous cycle and rhythm of trades over time does make