higher, we would like to diversify more, which we can do because of the smaller
amount of money tied up in each position.
Note that using DRMM does not mean that we let the volatility of the mar-
ket alter the amount risked. Instead, it means that we let it alter the waywe risk it,
by altering the ratio between the total amount risked and the risk per share—by
altering the ratio between the stop loss and money management point and the entry
price. In the end, this also alters the ratio between the number of possible open
positions and the number of stocks tracked. Because these ratios constantly change
with the volatility of all markets tracked and the fwe have decided to use, to
achieve our desired risk–reward ratio when it comes to the equity growth, I have
dubbed this money management method dynamic ratio money management, or
DRMM, for short.
Building a Sample Spreadsheet
We now know how to set a stop loss and a money management point, calculate the
number of shares to trade and the total amount committed, and how much we stand
to win or lose on the trade, all depending on the fictional fwe decide to apply to
the system. But how to decide on the fictional f? And how to do that for all open
trades on several different markets, traded with several different systems, running
simultaneously? Let’s take this process step-by-step and at the same time construct
an Excel spreadsheet that will do the work for us:
The first step is to type down the development of each trade, on a one-share
basis, as in Figure 26.3. Figure 26.3 shows a few trades for Market 2, recorded in
columns L to P. In this case, the spreadsheet is for three markets, with the same
data for Markets 1 and 3 recorded in columns B to F and V to Z, respectively.
Figure 26.3 shows that the first trade for this market started on row 11 and ended
on row 14. Each row represents one day of trading. The actual dates for this trade
aren’t shown, but are recorded in the A column (hidden from view in Figure 26.3).
Figure 26.3 shows that the entry price for the first trade was $32 (column L)
and, at the time for the entry, the MMP was set to 2 points (columns M) and the
stop loss to 0.75 points (column N). These values remain the same for as long as
the trade remains open at the end of that day’s trading, going into the next day.
Consequently, as long as the trade remains open at the end of the day, the open
profit and loss is recorded in column O. At the end of the last day of the trade (row
14), only the closed-out profit or loss is recorded (column P).
This particular trade lasts for two full days, plus one day when the entry
took place (which could have happened anytime during the day), plus one day
when the exit took place (which also could have happened anytime during the
day). Here it lasted four days, but different software calculates the number of days
differently. TradeStation, for example, doesn’t count the day of the entry as a day
in a trade.
310 PART 4 Money Management