Stocks & Commodities V. 26:8 (52-61): So Why Do You Need Money Management? B. McDowell Tells You by J. Gopalkrishnan and B. Faber

So Why Do You Need Money Management? B. McDowell Tells You by J. Gopalkrishnan and B. Faber

TradersCoach.com founder and president Bennett McDowell, considered an expert in technical analysis and complex trading platforms, lectures frequently, is internationally recognized as a leader in trading education, and teaches trading techniques to students worldwide. McDowell has written two books on trading, The ART Of Trading and A Trader’s Money Management System, both published by John Wiley & Sons. McDowell resides in San Diego, CA with his wife and two children and can be reached at Bennett@TradersCoach.com.

STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan (JG) and Staff Writer Bruce Faber (BF) interviewed Ben McDowell on June 4, 2008, via phone.

Ben, tell us how you got involved with trading.

I got into trading when I was working on Wall Street in the early 1980s. I also went on to trading and managing money as a broker for Prudential Securities and Morgan Stanley in the 1990s, and along the way I’ve managed my own money as well. We started TradersCoach.com around 1998. The firm started out by providing consultation and coaching services for active traders and even investors. We did a lot of work with money management. We did a lot with trading psychology. We built up a good referral business. Then people started asking me how I traded the market. At that time I had developed a proprietary system, Applied Reality Trading (ART), which we brought to the market in 2003. ART was initially a home study course and then we introduced software, and since then it has taken off. It was a good product to offer in conjunction with our other services.

JG: Why was your focus so much on money management?

Money management is as important as entries and exits. A lot of people, especially those just getting into the business of trading, think that software is going to do it all for them. Software is important and can be used as a tool, but one of the most important skills a trader has to develop is money management. Traders also have to develop other skills such as identifying market cycles and selecting markets. But without money management it is difficult for a trader — even if they have a decent trading system — to be successful. Money management is something that everybody needs, whether they are investors, daytraders, position traders, or if they trade the forex market, whether they just trade stocks, commodities — it doesn’t matter. The money management part of the equation is paramount to their success.

JG: Have you ever found yourself in a situation where you actually placed trades without stops?

That is a great question, and the answer is, “Of course.” Most traders, at the beginning of their careers, unless they were lucky enough to be associated with other traders who could teach them about money management, probably incurred a few large losses. We have found that in order to consistently implement a money management system, you have to believe you need it. And usually that belief doesn’t happen until you get hit in the face with a large loss. That is why so many new traders focus on entries and exits instead of money management, because they haven’t experienced the downside. Once they experience that, they want to implement money management.