P1:a/b P2:c/d QC:e/f T1:g
c14 JWBK182-McDowell April 25, 2008 16:23 Printer: Yet to come
146 A TRADER’S MONEY MANAGEMENT SYSTEMHOW WILL YOU SCALE IN TO A
POSITION?Scaling in to a position will increase your trade size and will increase your
risk. When doing this you must carefully balance your risk-to-reward prob-
abilities. Consider the following rules:
Only scale in to a winning position.
Do not double down.
When you scale in to a position, recalculate your risk based on the new
trade size and stop-loss exit.
Other:HOW WILL YOU DIVERSIFY?Diversification is crucial in managing your risk. There are a number of ways
to do this. It requires that you diversify all of your accounts, both invest-
ment and active trading. It also means that you do not invest or trade all of
your account in the company that you are employed by. The possible risk of
this is losing everything including your job, your investments, and your re-
tirement plan, which is what happened to Enron share holders (who were
also employees) that had virtually no diversification. Rule number one, do
not “put all your eggs in one basket,” so if that basket drops, it is only a
small portion of your holdings that are lost.
2 percent per sector can be risked at any give time. Example: If you
have a total of 6 percent of your trading account at risk, you could
have 2 percent in the technology sector, 2 percent in the energy sector,
and 2 percent in the currency sector.
Other:ESTABLISH YOUR RECORD KEEPING
RULESRecord keeping is essential in furthering your progress and profitability in
trading. This means you have to have the commitment to run the numbers
every day you trade. Not every other day or once a month, but every day.
Refer to Chapters 11 and 12 to find out more about record keeping. Here’s
a start of some rules to follow:
Track every single trade every day.
Write down the entry and exit price, and calculate the profit/loss.