Make sure you have done the Money Management Experiment!
In a chapter entitled "The Secrets of Successful
Trading" in Street Smarts, Fernando Diaz concluded:
"Successful traders have a larger edge and better money management than unsuccessful traders. Unlike popular
belief however, this study shows that the smaller edge of successful traders is not the cause of their failure.
Traders' failures can be explained almost exclusively by their poor money management practices."
When trading stocks or commodities the importance of Money Management is underestimated by a lot of traders. It is of much more importance than entry and exit decisions (=timing decisions) will ever be.
Very few indicators are better than a coin toss, and if they are, the edge is eaten up by slippage and commission.
Money Management is also sometimes called asset allocation, position sizing, portfolio heat, portfolio allocation, cash flow management, trade management, capital management, position management, size management, bet size selection, lot size selection, or even risk control, equity control, and damage control.
Money Management is managing the position size while Risk Management is about managing losses and open profits (unrealized trading returns).
Actually I don't like the term 'Money Management' as it also has a very general meaning (it's also used describing the "process" of saving, these "learn valuable skills" pages, talking about piggy banks and how to teach kids about paycheques).
But 'Money Management' tells a trader that (s-)he should concentrate his research on how to optimize capital usage and to view his/her portfolio(-)s as a whole.
Actually there are (at least) 2 steps to implement proper Money Management:
1) Bet sizing is the determination of what (fixed or non-fixed) fraction of a portfolio's total (or again fixed or non-fixed fraction) equity to risk on each trade expressed in Dollar-, Euro-, Yen-, or Swiss Franc-denominated currency values.
2) Position sizing, on the other hand, is the calculation of how many contracts I should hold in my position, once a trade entry is signaled which basically is a function of the BigPointValue (the number of dollars that a 1-point price move represents) and a rounding algorithm as the number of contracts/stocks can't be traded in fractions and must be cut down to a whole integer.
On my desk there are 5 statistics related books and just 2 on trading. So according to the books next to me my focus on statistics is at least 70% :-). A sound knowledge of statistics is a good start into the Money Management arena.
Here a 10 Money Management lessons, including strategies, hints & tips, source code, etc.
They are copied together indiscriminately from several sources from the Internet, from Trading Software, and Trading Literature.
These lessons won't automatically build wealth,
but will bring a wealth of experience and knowledge, which will prove invaluable
to you if both understood and applied properly. It will steer the course for your success in the global financial marketplace.
I hope you will find and pick what your trading system is desperately looking for.
If you are too lazy to dig deep to both find and understand these lessons I would advise to either refrain from trading or if you are really willing to learn nothing else, then learn this:
| Be bright,
give up being right, and
emphaSIZE on Position SIZE !!!
|Disclaimer/Copyrights:||© All copyrights remain with the authors.|
|moneyMan.zip||Download all the
Money Management Lessons (560k) to read offline.
Please extract with the Winzip-Option "Use folder names" to make sure the images in subdirectories are in place.
|Money Management Experiment-Spreadsheet (100k)|
|Money Management 1|
|Money Management 2|
|Money Management 3|
|Money Management 4|
|Money Management 5|
|Money Management 6|
|Money Management 7|
|Money Management 8|
|Money Management 9|
|Money Management 10|
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The more you smoke the less you poke.