A trader\'s money management system

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c02 JWBK182-McDowell April 25, 2008 15:39 Printer: Yet to come

20 A TRADER’S MONEY MANAGEMENT SYSTEM

the years, my plan has proven to me that it is far better to take a few small

losses than to take the big hits that are inevitable when you’ve got no plan

or an ineffective plan.

THE CALIFORNIA WILDFIRES ARE RAGING

TONIGHT

As I write this, the October Santa Ana winds are blowing the palm trees outside

to a tune of 70 miles an hour (that is nearly hurricane level). We’re based here

in San Diego, California, and as I speak there are 17 separate fires raging across

the state, the worst in history.

Mother Nature is a powerful and unpredictable force (much like the finan-

cial markets that we trade in) and she is relentless tonight. We haven’t been

evacuated yet, but since we live on a hilltop up on a canyon, we have a front

row seat to watch the “Witch Fire,” as it is called, advance in our direction. At

present it is about 5 miles away, a raging orange glow along the hills in the

black darkness.

There is no way to know if the fires will ultimately reach us (again unpre-

dictable, just like the markets), but the cars are packed with essentials like bed-

ding, food, water, clothing, and some toys for the kids. The wind could change

direction, it could intensify, or it could calm down. There is just no way to tell

for sure, and like the markets, the best plan is to accept where it is right this

minute and not try to predict the future.

With that said, we are certainly prepared for the worst-case scenario and

have already mentally played out the “war games” so that we can minimize the

downside if we should lose the house. That means having a plan that includes

homeowners’ insurance to rebuild if necessary, having the cars packed in ad-

vance so we can get the family out of danger, and watching the direction that

the fires are moving every step of the way.

My wife, Jean, and I will take shifts tonight to watch the hill, and if it gets

to a certain point we’ve agreed on, that’s when we’ll evacuate. Sure sounds like

an “exit” stop loss, doesn’t it? As long as our family members are safe, the loss

of material items is secondary. We have some experience with this fire plan,

since we survived the “Cedar Fire” here only four years ago. Sadly, the Cedar

Fire devastated our area. In our zip code of 92131, San Diego, there were 1,200

single-family homes standing before the fire. When the final count was taken,

and after the fire was put out by countless brave firefighters, one third of those

homes were completely burned to the ground. That comes to 400 homes in a

seven-mile radius—gone.

We were among the lucky ones, and our street was completely untouched.

But, many of our friends were affected by this heartbreaking event. In the region