Money Management

Money Management

All traders have one thing in common. Whether you are an optionstrader, a day trader, a stock trader, or a little bit of everything type oftrader, you are-at least in one way-like every other trader. No matterwhat the market or method, every trader must make a money managementdecision before entering a trade. Sometimes this is not even aconscious decision. For these traders, money management never evencrosses the scope of intentional thought. This is an extremely dangerousway to trade. It is amazing to me how much time traders spend researchingwhere to get in and where to get out of the markets but thenallocate to each trade with little more than a dart throw. Through myown experiences and a few illustrations, I hope to convey that propermoney management is the key to success in trading.In this chapter, I explain why and how I turned my focus to moneymanagement and then present several reasons you, and every othertrader, should focus on how to manage the money in your account, evenbefore you decide on what system or method to trade.When I trade, I examine something to a certain degree, make ajudgment call whether it is worth trading, and then do it. Paper tradingcan yield only so much information. The true story lies behindthe outcome of actually taking the trades. During one of my earlytrading experiences, I had opened an account for $10,000. This was,at the time, the most I had invested in a new trading venture. I alsohad decided to trade straight futures with this account. Until then, Ihad traded options, option spreads, covered options, futures spreads,and had written naked options. I had never traded straight futuresconsistently. However, I had just purchased a new trading systemfrom one of those guys who was retiring from a long life of profitabletrading and had decided to reveal his age-old, proven trading methodto a few honored select traders for $100. I qualified because I had$100. And, just for the record, I think the manual is still for sale ifyou want to get your hands on a copy.Anyway, I had coupled his method with some of my own analysisI was doing in the markets. I had noticed something that I thoughtwould be a very high probability trade-divergences. I decided that ifI saw a divergence setting up, I would use the entry and exit techniquesdescribed in this $100 manual. Soon after opening the account,I began trading these signals. There were, however, entirelytoo few of them to make me happy. So, I started doing some otherthings in the account to beef up the activity. Surprisingly (not thenbut now), I did very well. At the ripe old age of 21, I took a $10,000account and turned it into more than $20,000 in just four months.Because all of my previous trading ventures had been complete failures,I was absolutely elated at this new-found success. Downrightcocky might be a better phrase for it. I thought I had it made. And, itwasn’t because of some lucky trade that I had wandered onto. I hadmethodically, trading 20 markets, inched the account, trade by trade,to more than a 300 percent annualized return. At the age of 21, I hadachieved a status that only 10 percent of all traders achieved-positiveresults.That was on Thursday. On Friday, I was taking my wife on a littleweekend getaway. After driving for a few hours, I decided tostop, call my broker, and find out how my 11 positions were doing.I was in everything from natural gas to sugar. In several of themarkets, I had two or three contracts. When I called, I was informedthat 9 of the 11 positions had gone against me. Although itcertainly wasn’t devastating, I did not have the margin to carryall 11 positions through the weekend. Therefore, I liquidated afew of those, rationalized that the others would make up the slackon Monday and went on my way. I was a little disappointed andeven a little worried, but far from being devastated. That state wasstill to come.