Money Management in the Futures Markets
Money management, this is the buzzword of futures trading recently. Many say it,
few know what it is and even fewer practice it. Trading without a money management scheme is akin to trying to hit a home
run while swinging the fat end of the bat. Although there is a chance that you can succeed, the chances are very rare.
What is money management? Let's answer that by talking about what it is not. Here are the most popular misconceptions
about money management.
1.) Money Management is risking a fixed amount on any trade (fixed meaning an arbitrary amount - $500,
$400 or something like that).
2.) With a Money Management plan you will never loose trades, you will be highly accurate.
3.) Your trading will be consistent, meaning that you can count on profits to accumulate weekly,
monthly or quarterly.
Number One . Risk a fixed amount on each trade
This is perhaps the most violated rule of money management. Most traders loose in the markets because they one of two
things. First they don't have a predetermined risk point, or second they make up some amount to risk. At least the
second option has the making of a plan but it is still a juvenile mistake. Markets go through periods of high and low volatility.
Sometimes the markets will trade very slowly and methodically and then there are times when markets rocket. By choosing
you own risk amount you are ignoring what risk the market has at the moment.
Measuring the risk of the market at any given moment is not that difficult. The most popular and accepted way to measure
day-to-day volatility is by using the ATR or Average True Range. Most traders choose to look at the ATR over a period of time,
10 days for example. They will average the ATR over 10 days to see what the risk of the market is over this period. Stops are
set by using some multiple of the ATR and adding it to or subtracting it from your entry point. If you are long a market from 100
with a 10 point ATR, your 2*ATR stop would be 80. As the market experiences more or less volatility the ATR will rise or fall.
For information on how to calculate the ATR please visit our section on the ATR.
Number Two - you will loose rarely
People in general have a difficult time in being wrong. There is something deep down that does not allow humans to accept being wrong.
This cardinal flaw is the biggest reason why people cannot stick to a money management scheme. I will warn you about one
thing. When you begin trading properly that is with money management your percent accuracy can decrease. You will be wrong
more times than you are right. If you cannot accept being wrong, then you should find something else to do. I can show you
systems that are 90% accurate but still loose money over time. Learn to focus on what being successful means and don. t
concentrate on being accurate.
Number Three - consistent stream of income
This is also incorrect. If you are in the futures markets to provide consistent income then maybe you should look elsewhere.
There are some who can manage to do this, but the odds are against you. The big money in futures is made from following the
trend. That trend can be intra day or end of day. But substantial price moves are where large amounts of profits are made.
I believe it was Richard Dennis, one of the most successful traders of recent history that said 95% of my profits come from 5%
of my trades. Make this your goal. Keep the losses down so that your capital can be used for the large breakouts. This is not
to say that there are not some short term trading models that make money. I am sure that there are some out there that do.
What is money management? It is creating a set of circumstances that allow you to be profitable with the least percent accuracy.
This sounds so different from popular thought, but it is a life lesson. We often create circumstances where we have to be right
nearly 100% of the time in order to be successful. When the first stumble happens we feel defeated. No one is right all of the
time or even most of the time, especially when trading. Learn and accept being wrong. This is the key to trading.
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