A trader\'s money management system

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c06 JWBK182-McDowell April 25, 2008 15:54 Printer: Yet to come

46 A TRADER’S MONEY MANAGEMENT SYSTEM

system (see the sidebar). If you do currently have a system in place, review

these parameters to see if your system needs adjustments.

The primary purpose of your system is to make you feel comfort-

able and confident—if you feel that way, you ultimately will also be prof-

itable. You will feel this when your system has proven to you, and you

have proven to it, that you can work together and generate consistent

revenue. It is a team effort; you and your system are on the same team.

Testing your system and working together will create a solid relation-

ship between the two of you. After all, life is all about relationships,

isn’t it?

If you have not already done so, you need to paper trade your system

to get the bugs out. For those readers with a system they have been using

to make real trades in the markets, that will suffice. Determine what your

personal win ratio and payoff ratio is using your system over time. These

ratios will be used to develop a sound money management plan that will

work hand in hand with your trading system.

It takes three to tango. That would be your trading system, your money

management system, andyou! The stronger and more developed the re-

lationship is among the three of you, the more profitable you will be

over time.

FIVE PARAMETERS TO FOLLOW WHEN

SELECTING YOUR TRADING SYSTEM

The money management techniques presented in this book will work on any

type of system, whether it be fundamental, technical, or a combination of the

two. However, five parameters must be met in your system for these techniques

to work:

1.Trade entries are defined based on market price activity, key support and re-

sistance levels, volume, volatility dynamics, and/or fundamental rules (not

on random and spontaneous decisions).

2.Actual initial stop-loss exit is determinedpriorto placing the trade.

3.Trade exit is based on market price activity, key support and resistance

levels, volume, volatility dynamics, and/or fundamental rules, not on an

arbitrary dollar loss that feels comfortable to you.

4.Your system has been adequately paper traded or live traded so that you

have determined your personal statistical performance. You need to know

your win ratio and payoff ratio. (Do not rely on the performance stated

by others but the actual results you attain. Also, do not rely on computer

back-testing results, as your personal performance results are the only