A trader\'s money management system

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c07 JWBK182-McDowell April 25, 2008 15:58 Printer: Yet to come

60 A TRADER’S MONEY MANAGEMENT SYSTEM

Again, this isnotthe method I use for setting stops, but it is worth

testing if you do not currently have a system that selects stops based on

current market dynamics. Remember, do not arbitrarily determine stops

based on the flat dollar amount you are willing to lose. To say that you will

set your stop so that the most you lose is $100 or one point is to disregard

the importance of the current market conditions.

Another approach to test is to set your stop “one tick” beyond the sup-

port. For example, set your stop one tickbelowthe support in a bullish

trend. On V, set your stop one tickabovethe support in a bearish trend.

NOT SETTING STOPS

If you do not use stops at all you are setting yourself up for failure. When

trading stocks, for example, if you do not use stops and hang on to losing

trades to a point where you emotionally feel you cannot exit the trade be-

cause the loss is so large, you are married to the stock. However, it may

not be a stock you really want to own as an investment.

Some stocks we trade are good for short-term trades only because we

are taking advantage of the momentum. It may be a stock we would never

invest in and hold for a long time. If you find yourself wishing for a trade

to turn around, you’re not trading well. Based on the reasons you entered

and the location of your stop, you should always know in a second whether

you will be in or out.

SETTING MENTAL STOPS

For some markets, it is better not to put the stop actually in the market

when you have the position on. Some market makers will see your stop,

and if there are enough other traders with similar stops, the market makers

may try and hit your stop. Then they make money and you do not.

In markets like this, you can set a mental stop and get out immediately

if it is hit. Be sure you have the psychological toughness and discipline to

get out when you are supposed to. If you don’t, then go ahead and enter the

stop when you take the trade.

MOVING STOPS

Never move your stop for emotional reasons, especially when it is your

initial stop (see Figure 7.1). As new trailing stops are determined, you can