A trader\'s money management system

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c09 JWBK182-McDowell April 25, 2008 16:7 Printer: Yet to come

78 A TRADER’S MONEY MANAGEMENT SYSTEM

payoff ratios to adjust the percentage of risk you take with every new trade.

Use the formulas you will find in Chapter 11 of this book to calculate your

win ratios and payoff ratios.

Since your payoff ratio and probability of winning are not constant,

and these numbers will change daily, you will need to adjust your risk per-

centage accordingly. Determining how to analyze this data in and of itself

can be a part of your personal money management plan.

PROFESSOR NAUZER BALSARA WROTE THE

BOOK ON THE RISK OF RUIN TABLES

If you want the most extensive and comprehensive book on ROR tables, you

must getMoney Management Strategies for Futures Tradersby Nauzer Balsara,

John Wiley & Sons, 1992. This book is essential and required reading for any

serious trader and has a wealth of information for all traders, not just futures

traders. Amazon. com no doubt has the best price, and it is well worth the

investment.

In this book, starting on page 18, you will find a complete set of ROR tables.

Theparameterscoveredincludepayoffratiosof1,2,3,4,5,6,7,8,9,and10.

It includes win ratios from 5 percent wins all the way up to 90 percent wins.

There is a table for 10 percent risked capital up to 100 percent risked capital.

Truly, this information will arm you with the statistical data you need to risk

the correct amount as your payoff ratio increases from 1 to 2 to 3, and so on.

Remember, it is crucial to recalculate your risk amount for each trade based on

your current performance ratios.

RUNNING THE NUMBERS

Now that we’ve defined what the risk of ruin possibilities are, we need to

know what our personal rate of return is on our current system. Again,

we are assuming that you already have a trading system in place and that

the system over time is producing for you a better than 1-to-1 payoff ra-

tio. Meaning, you are making a profit instead of breaking even or incurring

losses over time.

This means that you must be tracking your trades, and determining

what your win ratio is and what your payoff ratio is. If you are not currently

doing this, then start now so that you can obtain historical data. It may be

helpful, if you have access to your old trading records, to go back in time

and determine what these statistics are—basically,run the numbers.