A trader\'s money management system

c05 JWBK182-McDowell April 25, 2008 15:51 Printer: Yet to come

Not Every Trade Will be a Winner 43

management system. You want to know how many dollars you earn

for every dollar you lose and what your percentage of wins to losses is.

3.Always use a stop-loss exit to cut losses short, and base your stop on

market dynamics rather than an arbitrary dollar amount.

4.Develop your psychology and confidence so that you consistently ad-

here to your stop-loss exits.

5.Determine proper trade size for your current portfolio size and limit

your risk per trade to 2 percent. (Advanced traders, see important note

following this list.)

6.Maintain impeccable records so you have a day-by-day analysis of your

profit/loss performance, and know immediately when your system is

failing due to a change in market cycle or in your psychology.

7.When your system is failing (by a given percentage that you have deter-

mined in your money management plan), stop trading with live money

and go back to the drawing board (paper trading) to determine what

the cause for failure is.

8.Once your testing and analysis and paper trading is proving profitable

again, reenter the market with a live cash account.

IMPORTANT NOTE: For some advanced traders, it is beneficial to

risk more than 2 percent of their trading account. The amount these

traders risk must be carefully calculated depending on their proven

historical performance statistics. See Chapter 9 for the formulas to

determine if your payoff ratio and win ratio performance warrant a

higher risk than 2 percent.

YOU’VE GOTTA HAVE A STOP

For our purposes, we will assume that you already have a system that tells

you when to enter a trade. (See more about entry rules and trading systems

in Chapter 6.)

After knowing where to enter, my first question is, does this system

also tell you where to get out—beforeyou enter the trade? My second ques-

tion is, if you do have a system that tells you where to get out before you

enter the trade, is this exit based on market dynamics? Meaning, are you

taking into account market conditions that will tell you how much room

you need to give your trade to “breathe” so that you don’t get whipsawed

and repeatedly stopped out?