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Guide To Monetary Awareness In Trading: MONEY MANAGEMENT
Author:
Muscas / Fabio
Publisher:
UNKNOWN
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Year:
2020
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M.O.N.E.Y. M.A.N.A.G.E.M.E.N.T.

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 empha

emphaSIZE on Position SIZE !!! on PositionSIZE !!!
Money Management 1

The underlying concept is, that, if we cannot accurately predict our own performance, and as we cannot influence how the markets will behave, we should at least exercise control over those variables that we have actually control of. And that is the risk that we as traders take when entering a position.

Few, if any, have the ability to view their portfolios as a whole and even fewer are able to optimize capital usage. Traders and investors must move from a defensive or reactive view of risk in which they measure risk to avoid losses, to an offensive or proactive posture in which risks are actively managed for a more efficient use of capital.

NO set of indicator rules will ever make money in futures trading. So forget about fractals, alligator, turtles, waves, cycles, etc.
The best these and ALL other indicators, including Moving averages and Breakouts, will do is make you break-even and at worst blow your account.

The KEY is in your Risk and Money Management.
Combined with sound risk and money management I could even reverse the above statement: "ANY set of indicators rules will make money in futures trading."

Choose a CLEAR, TREND following indicator. One that an 8 year old could tell you whether it is long or short. ONLY trend following indicators will work. If you have to think for more than 1 second whether it is long or short, it isn't clear enough. Stick to 1 indicator in 1 time frame. NEVER pay any money for other people's systems. They will NOT work.

ENTRY: Decide on whether you want to use Reversals or retracements. I recommend reversals.

RISK Management:
Trading only 1 contract at a time will cause you to FAIL !!!
Make sure you are well capitalized. This is not a game for those who are not.

The only way to win at futures trading is for you to be larger (have more positions) when you are right and less positions when you are wrong.

THIS IS THE KEY TO TRADING.
Maintaining the same number of contracts for each trade will cause you to FAIL. Varying contract size is the MOST important thing you must do, if you want to be successful.

Buying and Selling using the same number of contracts will at best, lead you no where and at worst, wipe you out in the long run. You can vary your positions with the following:
1) Stagger out of your trades when wrong (Phantom of the Pits points out that you should let the market prove you correct instead of letting it prove you wrong by hitting your stop loss).
The market goes against your entry (!!!). BUT hold on to all your positions when right. 2) Make sure your profit goal is larger than your stop loss point.

MONEY Management:
Never let a winner become a loser. Adjust your stops as the market moves with you. TREND: Use trend following indicators only. I recommend Moving average 2 lines and Break outs.
-----> Pick the shortest time frame with the longest trend indicator.

Principles of Money Management:
While Risk management dealt mainly with maximizing profits using contract size, Money management deals mainly with minimizing losses using stops, as well as showing you
when to take profits. They are both very closely intertwined with each other. You cannot have all risk rules but no money management rules, and vice versa. I gave you Rule #1 which says to stagger your stop losses, and here is ONE very important principle that you have to learn in Money management:

80% of your Profits will come from 20% of your trades (Pareto Principle). What do I mean by that? Let's say we are playing the game of 50/50. So 50% of our trades will be losers. There is no way avoiding it and we will attempt to keep those losses small by staggering our stops with multiple contracts.

The other 50% are NOT all going to be big winners. Out of that 50%, roughly half will be where you really make your money and the rest will pay for your losses. It is similar to running a business. 80% of your clients will pay your costs for running the business and 20% will be the reason you are in business.

Why is that? You will have trades where you are right initially but they will come back and become only small winners. This is okay, you will never be able to predict the exact perfect exit for a trade, but you can see where the problem is. If you don't capitalize on that 20% of trades where the price just keeps on going in your direction, you will end up just covering your losses and you will not get anywhere.

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