Fine-Tuning Your Money Management System by Bennett A. McDowell
Acknowledge the risks in trading the markets by making sure
your money management system is sound.
When you hear of someone making a huge killing
in the market on a relatively small trading
account, more likely than not it was a fluke: The
trader was not using sound money management
techniques. The trader probably exposed
his trading account to obscene risk due to an abnormally large trade size. The trader may have just gotten
lucky and experienced a profit windfall. Trading like this
means it’s just a matter of time before huge losses dwarf the
wins, and the trader is devastated emotionally and financially.
Money management in trading involves specialized techniques
combined with your own judgment. Not adhering to a
sound money management program can find you exposed to
a deadly risk of ruin, and, worst of all, most probable equity
bust. Keeping this in mind, you may find a few essential
money management techniques can make a big difference to
your bottom line. (See sidebar, “Proven money management
techniques.”) Here are some things to remember when it
comes to money management.
CALCULATING PROPER TRADE SIZE
If you are trading the exact same number of shares or
contracts on every trade, you may not be calculating the
proper trade size for your own risk tolerance. Trade size can
vary from trade to trade because your entries, stops, and
account size are constantly changing variables.
To help reduce your risk exposure, the first step is for you to
believe you need this sort of program. Usually, this belief comes
from suffering a few large losses that make you want to change.
This kind of experience can enable you to see how the wrong trade
size and lack of discipline can sabotage your trading results.