A trader\'s money management system

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66 A TRADER’S MONEY MANAGEMENT SYSTEM

Properlyscaling outof positions can not only make you more profitable,

but also significantly reduce stress.

In order to scale out of trades, your initial trade size must be large

enough so you can reap the benefits of scaling out. The technique is ap-

plicable for both long and short positions, and for all markets—including

futures, stocks, indexes, and options. The key is to initiate a large enough

trade size while not risking more than 2 percent on entering the trade.

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.

When scaling out, your trade size, in contracts or shares, should be

large enough so that you can take one-third of your position out of the

market when you get a signal to do so. After taking your first third off

the table, you can take one more third off if a second scaling signal presents

itself. The remaining third stays on until your stop-loss exit is hit.

Take a look at Figure 8.1, which shows a bearish trend and six con-

secutive bearish primary pyramid trading points labeled with a P. This is a

strong profitable trend. Statistically, theARTtrading system exhibitstrend

exhaustionafter four to five consecutive pyramid trading points in the

same direction.

What this tells me is that by the fourth down triangle, the trend is prob-

ably nearing exhaustion. Given my entry and exit rules, I have not been

stopped out on this trade yet, but at the same time it is clear that due to

trend exhaustion, it may be time to scale out a portion of my position.

So, when a bullishARTreversal presents itself, that signal tells me

there is an opportunity to scale-out of 30 percent of my position and I do

so. The market meanders along sideways, and another bullishARTrever-

sal presents itself. Again, I liquidate another 30 percent of my position.

The remaining portion stays on until I am stopped out as price activity

heads north.

Figure 8.2 shows another example of this scaling-out technique. Here,

this bull market experiences a hyperbolic move to the upside, which al-

ways has a way of getting my attention. In this example, you will see three

consecutive up triangles labeled with a P prior to the hyperbolic move.

At the top of this sharp upturn is a down triangle labeled with an MP,

which is a minor pyramid trading point. This signal does not indicate a

trend change; it only indicates a trend correction. The MP signal is the one