Have you completed lesson 5’s action steps?
If not, complete those steps before reading on.
“Do not focus on making money; focus on protecting what you have.” – Paul Tudor Jones
Lesson 6
Excellent Money Management
To begin with, let me destroy a common myth: there are no trading systems
that will pick winning trades one hundred percent of the time. Despite this
fact, many novice traders undertake a determined search to find the perfect
indicator(s) that will lead them to trading success.
Even though this may sound absurd, you too may search for the silver bullet
to slay the market. So why do most market participants search for this perfect
entry? I believe the reason is a subconscious one.
The problem is that focusing on your entry you get a feeling
of control. The point you have chosen to enter the market is
the point at which the market is doing exactly what you want
it to do. As a result, you feel like there is some sort of
control, not over the entry, but over the market. This is where
most traders go
wrong.
Let me save you the time and money with this
IMPORTANT TIP!
No such perfect indicator exists. It does not today, never did
and never will.
Please save yourself hours upon hours of your valuable time…
and devote yourself to a more fruitful activity.
Once you are in a position in the market, the market is going
to do whatever it wants to do. We cannot control the direction
of the market, or the extent of the move. There is only one
component we do have control over and that is your money management.
Here lays the true Holy Grail of trading.
Jack Schwager's book
Market Wizards makes some intriguing statements
about money management. In Market Wizards, Jack Schwager interviews
some of the world's top traders and investors. Practically all
of them talked about the
importance of money management. Here
are a few sample quotes:
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"Risk management is the most important thing to be well understood.
Undertrade, undertrade, undertrade is my second piece of advice.
Whatever you think your position ought to be, cut it at least
in half." - Bruce Kovner
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"Never risk more than 1% of your total equity in any one trade.
By risking 1%, I am indifferent to any individual trade. Keeping
your risk small and constant is absolutely critical." - Larry
Hite
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"You have to minimize your
losses and try to preserve capital
for those very few instances where
you can make a lot in a very
short period of time. What you can’t
afford to do is throw away
your capital on suboptimal trades". -
Richard Dennis
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Despite its importance, money management still remains relatively
unknown by many traders and investors around the world. The
reality is that most people look at trading as a game of odds.
True it does contain odds, but odds alone do not tell the whole
story.
When you look at trading systems, are you someone who only looks
at the ratio of wins to losses? After all, it seems logical
that a system that generates 8 winning trades out of 10 is better
than one that only has 4 out of 10… right? wrong.
The best way to look at trades is this. Winning and profiting
are two totally different things. If your system has an 80%
odd of winning $1 and a 20% chance of losing $100, this is a
negatively biased system, or in other words, has a negative
expectancy. Therefore, despite the fact that you may experience
many winning trades, in the end you are bound to lose everything.
Stringing together a couple of dozen winning trades, valued
at $1 each, followed by a single loss of $100 will guarantee
a trip to the poor house. Expectancy is calculated as:
(% of Wins x Average Win Size) – (% of Losses x Average Loss
Size) = Expectancy
So in our example we can see that:
(80% x $10) – (20% x $100)
$8 - $20 = -$12
This strategy has a negative expectancy a system that has a
positive expectancy could lose 80% of the time, yet still be
profitable.
Using the same numbers:
(20% x $100) – (80% x $10)
$20 - $8 = +$12
Is this example too far fetched? No. I have witnessed day in
day out the common trading patterns of would be professional
traders. The instinctive action is to take profits the moment
they appear, and ride losses until they are unbearable. That
is exactly what an 80% win to 20% loss negative expectancy system
looks like. They take lots of small wins, but lose their profit
and more to the few losses they let become huge. The major reason
why people fall prey to this is because they do not have a clearly
defined money management rules.
So what is money management?
Simply money management is a set of rules and guidelines that
keep your risk at a level at which you are comfortable with.
It includes rules that define exit points, maximum loss per
trade, maximum exposure and other key variables that affect
your capital allocation.
Money management answers the questions such as:
- When should you exit a trade?
- What is the exact amount of risk you accept for each trade?
- How large should your position sizes be?
Although, these questions may sound simple, what makes the answers
so critical, is that if you get it “right” you can be wrong
50% of the time & still make money. Money management rules truly
are your safeguard against financial ruin.
At this point, I feel it’s prudent to repeat the goal of the
Ultimate Trading Systems - “to provide you with a step-by-step
road map to designing profitable trading systems.” Remember,
if I make a suggestion for a resource, it's only because it
will
speed up your success…
My mentor in this area of trading was an amazing trader and
psychologist called Dr Van Tharp. And although I recommend his
book -
Trade Your Way to Financial Freedom - many people feel
it is simply out of their reach. The language he uses and his
ideas can, at times appear, very complex and sophisticated.
I must admit, I did have to read and re-read this book numerous
times to fully understand his concepts.
It has taken me years to simplify these rules and although it
was a tough road to pave, the rewards have been worth it. The
good news is you do not have to go down the same long road I
did. After countless clients asking for coaching on this topic,
I decided to create a system that takes you through the process
of designing excellent money management rules step-by-step.
I named it “
Trading Secrets Revealed”.
Trading Secrets Revealed really is the first package of its
kind, since it reveals the secrets I, and many other professional
traders use to consistently make profits from the markets… best
of all it does so in a no B.S. no fluff, no nonsense fashion.
Don’t take my word for it though, the response to this package
has been phenomenal… Here is what one client said:
Trading Secrets Revealed Testimonial
"I wanted to let you know that since I read your material in
early May, I have implemented several items, including limiting
my loss to 2% of float and using your initial and trailing stops,
into my own trading system. As a result I definitely have more
confidence and less stress about my trades.
I am happy to report that my portfolio in June grew 49%. Thank
for your help and keep up the great work."
Ed Gallagher - Private Trader - Pennsylvania, USA
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By learning money management you too can achieve results just
like these. Again you have two choices, you can either read
the complex concepts in
Trade Your Way to Financial Freedomor if you’d like to learn these secrets in an easy to listen
to audio course check out
Trading Secrets Revealed (I’ll even
go through in a whole host of bonuses if you do).
At the completion of the program, your next task is to get your
money management rules written down.
Similar to your entry rules, excellent money management rules
are simple, direct, and leave no room for human judgment. Take
the money management rules from
Trade Your Way to Financial
Freedom or
Trading Secrets Revealed and write out exactly how
you will manage your risk.
YOUR MONEY MANAGEMENT RULES
Remember, money management really is the most important aspect
of any trading system. By documenting this step, you have put
yourself into the top 3% of traders. Congratulations!! You
are moving closer to the top 1%.
Let’s get your money management rules right.
MUST DO ACTION STEPS:
- Click Here to purchase a copy of Trading Secrets Revealed. Soon you’ll discover the secrets to money management.
- Listen to Trading Secrets Revealed and write down in plain English the money management rules as outlined in the program (you may also need to reference the package you purchased in the previous chapter containing your entry signals).
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