Money Management

Posted on November 3, 2018 by Murray

How should I manage my money?

By the staff at: The Shadow Traders Zone

This is a common question for new traders and those who have been struggling with consistent profits.  In this Traders Tip we will discuss a few different options to help you decide which way is best for you.  There are many ways to manage your money and the only person who will know the best way for you to manage your money is… YOU!

And before you ask, yes we will share the plan we have for our trading room, but let’s save that for the end of this article so you have the understanding of this material before you see what we do.

Our list will be neither complex nor complete; for each option we provide there will be many derivatives which have the ability to literally drive you around the bend.  We have simplified these to help keep your options digestible.  Don’t overwhelm yourself and don’t make your method so complex as to be unmanageable, pun INTENDED!

The methods presented are all intended for Futures Day Traders.  You may be able to adapt these to other markets and time frames; however, we only suggest these be applied to the intended markets until you have tested them against other markets.

Core Concepts

Money Management takes care of a few key principles that affect your ability to trade.  First and foremost is your Trading Psychology.  It has been said that mental anguish is the biggest challenge in trading and is responsible for up to 95% of your trading success.  We have not done the research to confirm any particular number, however we will say that Trader Psychology is VERY IMPORTANT to your trading success, and probably the biggest hurdle to master and manage.

Also, there are the wealth factors.  With poor money management comes the risk of blowing out your account and starting over from the beginning.  Some people will tell you that if you have not done this 3 times then you are not really a trader.  We would dispute that attitude and we promote highly disciplined money management from your first trading day.  If you manage your money well then you will be on track to successfully grow your trading account, allowing you to start trading more contracts and maintain a high level of trading psychology.

For you Star Wars fans, these are like a symbiont circle.  They are all intertwined and when managed well they feed off each other, either for your benefit or detriment.  We believe the former is more desirable, however that requires planning and discipline.

Initial Values

To start out you need to determine what your daily target is and what your maximum daily loss would be.

Most choose targets on either a dollars or ticks per contract basis. That makes it very easy to scale up your target as your account and trade size grows.  Many traders use a dollar amount so that the value of the tick does not alter the bottom line.  Make this value a REALISTIC goal.  If you set your goals too high, then you will not reach them.  You need a value that you can reliably and consistently meet, day after day.

When choosing your daily maximum loss, you need to consider your account size.  The usual values recommended are 1 or 2 percent of your account.  For a smaller account you may have to take a slightly larger number, but when you are choosing consider the following 2 points. First, most beginning traders over leverage their trades by trading too many contracts for their account size or experience.  The smartest path is to start with only 1 contract, especially in a very small account, and set tight loss limits.  The second point is that on a day where you are not trading successfully, if you take only a small loss then you can come back and trade another day.

If you reach your maximum daily loss there is no decision to make, you stop trading and come back tomorrow.  On the other hand, when things are going well and you have reached or slightly exceeded your target for the day you have reached a decision point.  At this time you follow your trading plan, which will guide you to managing any further trading you choose to do that day.

Let’s look at a few options that we think may offer you appropriate choices.

Stop Trading

Our first and most obvious option is to stop trading, close your brokerage account and charts and take the rest of the day off.  This is a great option for those who have progressed in their trading and are trading enough contracts to be making all that they want to when they reach this goal.  Many new traders, or those who have been struggling, are not yet ready for this option, but for those who are you have locked in your money and moved on to living your desired lifestyle, the ultimate goal for most traders!

Go to SIM trading

Our second option, which is very popular, is to stop trading real money and move to trading a simulated account.  For the beginning trader this is a great option.  As you are learning and building confidence, locking in your winnings allows you to continue trading without risking that capital which has been gained in this trading session.  That in turn allows anxiety free trading and more experience in the markets.

Continue trading until you take your first loss

Some traders choose to continue trading until they take their first loss.  In this instance we are thinking primarily of the trader who is only trading one contract.  This option offers greater gains, but it also puts money at risk and it also puts your daily target at risk.

If you have just reached your target and the next trade is a loser, then you stop trading below your target level.  You stop because you cannot take additional risk against your remaining profit if you take additional losing trades.  On the other side of the coin here is that you could take several more winning trades before you have a loss, which would give you a bonus above your daily target.  For some this will work well for them in the long run because typically you will have more days where you get extra winners than days where you stop trading below your target.

The risk here is the mental anguish caused if you do take a loss early and stop trading below your target.  For some that can be terribly detrimental to their trading psychology, for others the bonus days overwhelm the below target days and it does not affect them.  Each trader is an individual and only you will know how this will impact your trading psychology.

Continue Trading with a smaller size

We consider this a bit of a hybrid strategy.  For those who have been trading for a while, are experiencing a comfortable success rate and are trading multiple contracts then reaching your target can be a signal to reduce the number of contracts traded.  That in turn reduces the risk amount that a loss would bring.

It is common as you trade more contracts and experience bigger targets that continuing to trade will cause more anxiety.  If you are trading 2 or more contracts and meet your target then continuing to trade with less contracts will often reduce your anxiety, allowing you to keep on making money with smaller risk.

There are 2 simple modifications to this option.  The first is as soon as you take your first loss you then stop trading for the day.  You have most likely made more than your target and once the first loss occurs it is very good for your trading psychology to be done for the day, with profits greater than your initial target.

The second option is once you have made enough money above your target that trading your original number of contracts would still leave you above your target. Then if you had a single loss  you could again increase your trade size back to the original number of contracts and continue trading until your first loss.

What we do in the trading room

In the trading room we trade 3 contracts.  We have chosen $525 as our profit target.  This is the equivalent of $175 per contract, or 5 winning trades on crude oil using our 4 tick profit targets.

Once we reach our target we reduce to 1 contract and continue to trade that contract until we close the room.  We do not use the stop trading at 1 contract rule because in the room we need to ensure you have confidence in our trading and we do not feel that would happen should we switch to sim trading.  Also we have confidence in our ability to end the day positive regardless of a loss or two.

We recognize that for various reasons members in the room will not necessarily get all the trades that we take.  We also believe that this option will continue to give our members confidence and maintain our credibility.  That will allow those who desire to continue taking trades along with us.

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