Money Management, Part 1

There are some common mistakes I’ve seen traders make in the area of  money   management . First, let’s understand what  money   management  is all about.

 Money   management  overlaps with risk, trade, business, and personal management, yet it has many aspects that make it unique, distinctly different from all of the other areas of management. In this chapter we want to examine some areas of  money   management  that seem to involve mental quirks leading to costly mistakes.

LISTENING TO OPINION

Kim has entered a short position in crude oil after carefully studying as many factors as she could reasonably include while making her decision to trade. She has entered the trade because her study of the underlying fundamentals has her convinced that crude oil prices must soon begin to fall. Then Kim turns on her television set and begins to watch one of the financial news stations. An “expert” in crude oil is being interviewed. He begins to talk about how crude oil inventories are almost certain to drop this year because oil companies are not doing as much exploration as they have in previous years. Kim listens intently to what he has to say and then begins to doubt her decision about the trade she has entered. The more she thinks about it, the more panicky she becomes. She considers abandoning her position even though she will end up with a loss. The fact that an “expert” has decided something else completely shakes her confidence. She exits the trade intraday and takes a $400 loss. Prices have not come near her protective stop, which was $700 away from her entry. The market never moves sufficiently far to have taken out her stop. By the end of the day, her crude oil futures have made a new high, and in the following days explodes into a genuine bull market. Instead of a magnificent win, Kim has a loss. The loss is more than money, she has lost confidence in herself.

What should be done?

You should set your own trading guidelines and trade what you see. Forget about opinion, your own and especially that of others. Unless you are one of a very rare breed whose opinions are sufficiently good for trading, do not trade on them.

Make an evaluation based on the facts you have and then go with the trade. Just be sure you have a strategy for extricating yourself before losses become big. Had Kim stayed with her original strategy and stop placement, she would have ended up a happy winner instead of a regretful loser.

TAKING TOO BIG A BITE

Biting off more than can be chewed is a weakness of many traders. This form of over trading derives from greed and failing to have clearly defined trading objectives. Trading only to “make money” is not sufficient.

Pete has sold short T-Bonds and is now ahead by a full point. He notes that he is making money on his trade. Feeling very confident and thinking it would be smart to be diversified, he enters a long position in silver futures, and also sells short Call options of wheat which he is sure is headed down. Almost as soon he is in the market, wheat prices explode upward and his Calls are in trouble. Pete buys back the losing short Calls and sells additional Calls on a two-for-one basis at a higher strike price. At the end of the day he looks at other positions. Silver had an intraday reversal leaving a spiked bottom as they close at the high of the day. The T-Bonds have made an inside day, but to Pete they suddenly look weak, he is down a few ticks. At the end of the day, he finds that most of the money he had made on his short T-Bonds was used to buy back the short wheat Call options. He covered those and now has additional premium in his account, but he also has additional risk, and is short Calls in a rising market – not an enviable position. Moreover, he is now worried about his long silver futures based on the fact that silver closed at its lows on what seems to be a genuine reversal. To further aggravate the situation, he has lost confidence in himself. What was once a happy, simple, winning silver long, has now become an ugly, confusing mess, and Pete has a good chance of ending up a loser on all three trades. If Pete keeps over-trading in this fashion, he could end up like the poor fellow in the picture.

What should be done?

Break every trade into definitive goals. Make sure you achieve those goals before adding other positions. Even with a single short sale of the T-Bonds, Pete could have set himself a goal for the trade. One or two full points might have been all he needed to satisfactorily retire that trade as a winner. Then he could have made his trading decision for an additional position. There are very few traders who can successfully manage multiple positions in a variety of markets.

OVERCONFIDENCE

Overconfidence is a particular kind of trap that springs shut when people have or think they have special information or personal experience, no matter how limited. That’s why small traders get hurt trading on no more information than “hot-tips.”

Tim is a farmer. He raises hogs and purchases huge amounts of feed to provide for his hogs. Tim has a large farming operation which is quite profitable. He takes 250 hogs a week to market. Because of a steady flow of hogs from his operation to the market, Tim has no need to hedge his hog business because he is able to dollar average the prices he gets for them. But Tim does want to indirectly reduce the cost of the feed he has to buy, so he purchases soy meal futures. Tim listens to weather and farm reports all day long. He attends meetings of other farmers, and tries to gather all the information he can that might help him be more profitable. But Tim has a major problem, called tunnel vision. When he looks out at the grain fields in the area where he lives, whatever he sees there he extrapolates to the whole world.

In other words, if Tim sees that the surrounding fields are dry, he suspects that all fields everywhere must also be dry. One year Tim witnessed a local drought. He checked with all the local farmers and they said they were truly experiencing drought conditions. He looked at the news on his data feed, and sure enough it said that there was a drought in his area. In fact, the entire state where Tim raises his hogs was undergoing drought.

Tim wasn’t too concerned about his own feed bins. He had plenty of it in his silos from previous bumper crop years. Tim decided to be piggish and speculate on what he considered to be inside information. He called his broker and bought heavily into soy meal futures. Tim was confident. He was sure that soy meal prices would explode upward some time soon, and that he was going to make himself a small fortune. Tim’s greed may have turned him into a hog. However, the futures he purchased started moving down and the value of his investment began to shrink markedly. What Tim failed to do was to have a broader perspective. Everywhere else that grains were grown, farmers were experiencing rain in due season. The drought was localized almost entirely within the state in which Tim did his hog raising. Tim lost because he was confident in the limited knowledge he had.

What should be done?

We all need to broaden our horizons. We need a humble attitude relative to the markets. We can never afford to wallow in overconfidence in what we perceive as special knowledge. A trader can never afford to let his guard down. Tim thought he knew something that others hadn’t yet caught onto. In so doing, Tim made another mistake as well. He heard only what he wanted to hear.

HEARING WHAT YOU WANT TO HEAR – SEEING WHAT YOU WANT TO SEE

Marketers call this preferential bias. Preferential bias exists among traders. Once they develop a preference for a trade, they often distort additional information to support their view. This is why an otherwise conscientious trader may choose to ignore what the market is really doing. We’ve seen traders convince themselves that a market was going up when, in fact, it was in an established downtrend. We’ve seen traders poll their friends and brokers until they obtained an opinion that agreed with their own, and then enter a trade based upon that opinion.

A student of ours, Fran and her husband, John, decided they wanted to go to live in the Missouri Ozarks. Everyone told them that there was no way for them to make a living there.

Everyone they asked

advised them not to do it.

Finally, a minister in the Church they proposed to attend told them that they were to serve there. Out of twenty or thirty people they asked, that minister was the only one who told them to come. Of course, it was exactly what they wanted to hear. They sold their home and most of their possessions accumulated over a lifetime. They moved to the Ozarks and went broke within a year. They had to leave and begin all over again. John, who had been semi-retired, now had to find a job. So did Fran. She had to give up a promising start as a trader to go out to put food on the table.

What should be done?

Look at each trade objectively. Do not allow yourself to become married to your opinion. Learn to recognize the difference between what you see, what you feel, and what you think. Then, throw out what you think. Lock out the input of others once you have made up your mind. Don’t let your broker tell you what you want to hear. Never ask your broker, your friends, or your relatives for an opinion. Turn off your TV or radio, you don’t need to see or hear what they have to say. Take all indicators off your chart and just look at the price bars. If you still see a trade there, then go for it.

To be continued in Article Part 2 about  Money   Management !

Joe Ross

Trading Educators Inc



Money Management in Sports Betting

One of the biggest problems that bettors struggle with is that they just don’t know how to manage their money. It does not matter how many picks you hit or how good you are at sports betting if you don’t understand how to manage your money. There is no way that bettors can be successful if they insist on putting all of their money on each pick they make. A good  money   management  system will help you come out on top at the end of the month.

No matter how good you are at picking games, you are eventually going to lose one. Maybe it will be the result of bad luck or just plain bad handicapping. Whatever the case, a loss can be a big one if you don’t have the right  money   management  tactics. So how does a player do their best to make sure that there is a nice profit at the end of every month? Specifically, it comes down to having and following a system that places a certain, fixed amount of money on every pick.

One of the nice things about some of the sites out there that provide picks is that they will often include a number of “units” or an amount of money to bet along with that pick. The site will give out lots of picks each month and each of them will have this value. Though they will not all be winners, the majority of these picks will come home with value. If players are smart enough to follow a system and bet only a portion of their bankroll on each game, they can make a profit when the month is over.

It isn’t rocket science and all gamblers can employ this sort of system. If you want to be successful at this game, then you have to know not only who to bet, but how much to bet, which a good sports betting site can help you know. These things go hand in hand.



Money Management

Your bankroll must be protected at all costs, a good bankroll will get you through the ups and downs of sports wagering.

You must think of Sports Wagering in the very same light as you would Stock Market investments… in either form of investment, you have to have a “Cushion” to get you through the ups and downs of a market that naturally rises and falls during any given cycle.

I recommend wagering NO MORE than 5% of your bankroll on any one game, period. I have found that the very best way to protect your bankroll is to incrementally raise or lower the amount that you will wager by “Percentage of Bankroll”.

For example, lets say that you have a starting Bankroll of $5000, this should be an amount that is set aside and dedicated to nothing else but sports wagering, don’t fall into the trap of the ordinary “Joe Public” type of gambler that does not start the season with a “Dedicated Starting Bankroll” and instead finds themselves dipping into their mortgage or rent payment or car payment and before long winds up playing with “Scared Money” because they know that they can not afford to lose, this type of gambler usually ends up digging a hole for themselves that they can not climb out of!!

When utilizing the “Percentage of Bankroll” concept that I mentioned, a top play selection would be 5% of your starting bankroll, in our example let’s say its $5000, thus 5% of $5000 is $250.00, a medium play would be 3% of your starting bankroll, but most plays should fall into the “Regular” or small selection status of only 1% of your starting bankroll.

Each week your starting Bankroll would be different because of how you did the previous week, therefore, each week your wagering amounts based on 5%, 3%, and 1% of the bankroll would be different.

So, I would recommend either using a “Flat Betting” system which means that you wager the same amount on each contest but is still based on percentage of bankroll and self adjusts each week based on your new starting bankroll.

Or use the incremental system of 5%, 3%, 1%, to wager different amounts on different games, but keep in mind that the top wager is still only 5% of your bankroll… remember this simple rule of thumb and it will keep you out of trouble my friend!!

Using either system as I have outlined will keep your bankroll safe and sound over the ups and downs of a long season.



Sports Handicapping and Money Management – Part 4

One difference between the previous card game scenario described in Part 2 of our Sports Handicapping And Money Management series and sports wagering is that while there was only one betting event at a time at the card table, there will quite often be multiple sports investment opportunities available at the same time.

After determining that 2-5% of current bankroll is the PRO INFO SPORTS “Peak Profit Percentage” to wager per event as detailed in “Sports Handicapping And Money Management – Part 3”, we resolved the question of how many such events would be financially prudent to wager simultaneously. It was calculated that putting to work up to 25% of a bankroll at one time on a consistent basis offers the greatest potential for compounding profits without being unnecessarily risky if enough worthy investment opportunities are available.

Due to the sharp sports odds put up by the linesmakers, the majority of selections will be made from the lower half of the STAR RATING SYSTEM scale. We use this to our advantage by employing the multiple lower-rated selections as hedge investments against the few higher-rated selections and vice-versa. The Money Plays that risk a higher bankroll percentage are properly balanced by the more numerous lower-bankroll percentage investments. The following gaming analogy demonstrates the importance of such a strategy:

Don’t Lose Your Marbles

Imagine 7 barrels, each containing 1000 marbles. The first barrel has 600 marbles marked “WINNER” and 400 marbles marked “LOSER”. Each successive barrel has 10 fewer WINNER marbles and, thus, 10 more LOSER marbles. The last barrel would have a slimmest majority of WINNERS (540) and highest number of LOSERS (460).

As in sports handicapping and gaming, the object for a player is to win as much money as possible in the shortest amount of time by wagering on and selecting WINNER marbles.

To truly imitate wagering conditions we must also stipulate that the bettor is allowed incrementally more wagering chances with the barrels that contain a higher percentage of LOSERS. We can use the Peak Profit Percentage principle to determine what the proper bankroll wager would be for each of the barrels, which is what we have done with our STAR RATING SYSTEM; however, the question remains of how many bets to make on each barrel.

The proper PPP on the barrels with 60% WINNERS should be wagered as often as allowed by the rules; however, while there is a 60% chance that the first marble selected from that barrel will be a WINNER, there is also a corresponding 40% chance it will be a LOSER. If a total of only 10 marbles are allowed to be taken from the barrel, 60% of them “should” be WINNERS; however, 10 marbles out of 1000 is a scant 1% sample and any combination of WINNER and LOSER marbles is quite possible.

To increase the chances of drawing the same percentage of WINNERS as actually exist in any of the barrels, a higher number of marbles must be drawn. If the number of marbles allowed to be selected increase successively from the barrel with 60% WINNER marbles to the barrel with 54% WINNER marbles, so must the wagers. If 900 marbles are allowed to be selected from the barrel containing just 540 WINNER marbles, a winning advantage very close to 54% is nearly guaranteed.

The greedy bettor will “play the lottery” with only the few marbles he gets to select from the barrel with 60% WINNERS and hope he gets lucky with high bankroll bets. This is like a sports gaming investor who only plays a highest-rated play or 2 each week.

Meanwhile, the risk-adverse bettor will wager the minimal amount on all of the marbles and have to be satisfied with a very small profit. This is like a sports gaming investor who will only play a very small percentage of bankroll over many games each week.

The balanced investor will implement the best of both strategies, using the proper PPPs to make higher bankroll percentage wagers on a select few games and lower bankroll percentage wagers over a greater number of games.

This balanced investor stands the best chance of showing the biggest profit over the shortest amount of time because of the lower-rated selections acting as a hedge against the higher-rated selections and vice-versa in case one of them does not return a profit. Utilizing the Peak Profit Percentages and STAR RATING SYSTEM, this is precisely what the PRO INFO SPORTS Money Management strategy is designed to do, and why it is important for clients to invest in all recommended Money Plays at the recommended bankroll percentage.

Up to 10 Money Plays are featured per investment “session”. Some days there may even have more than one session, such as a Saturday with early, afternoon, and late college football and basketball games. On days with a very limited schedule, an Opinion Selection should at least be offered with the usual comprehensive sports handicapping information, analysis, and advice if no investment opportunities are rated high enough to be a STAR SELECTION.

It must always be remembered that handicapping sports and wagering is to be approached In a professional manner. Sports handicappers and investors must be mentally and emotionally prepared for the ups and downs that will occur simply due to the laws of averages that are inherent with any type of investing. We are supremely confident that putting our Money Management strategy to work with our sports handicapping information, analysis, and advice will be a rewarding and enjoyable sports investment venture.



You Can Get Valuable Service From Money Management Firms

While not everyone likes to admit it, businesses and corporations realistically exist for one reason and one reason only: to make a profit for the owners of the company or for the shareholders of the corporation. For many businesses of all sizes, making use of the services of  money   management  firms can help to assure profitability and cash managerial procedures so that the business can continue to grow and flourish.

On the flip-side of companies being in a growth mode is the situation where companies are not making cash. In that case, there’s really no viable reason for them to exist. This leads to business failure, shutting down the operation and putting people out or work. Typically, unpaid debts will be left in the wake and will cause a ripple effect and impact other companies and their business cash managerial systems.

The professional  money   management  firms are fully capable of handling a variety of monetary needs and financial managerial solutions, providing many financial services for their customers. Typically, the clients can range from individuals with significant investments and assets that need to be managed, to various sized companies, and to many types of governmental agencies as well.

Within the many financial  management  firms, which exist in virtually every city and state across the country, are skilled and experienced cash managers who each have their own approaches, techniques, philosophies and styles when it comes to business financial  management  and personal  money   management . Some financial planners and money managers will specialize in certain types of investments or in serving certain types of clients, while others will work with a broad spectrum of clients and financial managerial solutions and systems.

There are many financial management firms that specialize in buying and holding fixed income securities, such as securities backed by mortgages, asset-back securities, or various types of bonds, such as municipal bonds or corporate bonds. Other  money   management  firm operations will have a stronger focus on equities, such as large and small cap stocks, international investments, or emerging market stocks.

It can be a rewarding, challenging and interesting career choice to go into  money  and financial  management  services, and  money  managerial companies are always on the lookout for people who can flourish in this fast-paced and demanding field. Typically, people who have strong social skills, a high level of intelligence, strong motivation to succeed and a desire to help their clients improve their financial situation will be a good match for a career in this area.

People who have an interest in changing careers and going into the field of  money   management  or financial planning and working for any of the large  money   management  firms will find numerous opportunities, if they are motivated and prepared. Preparation for this field should include learning the various portfolio managerial theories, understanding the different investment vehicles, and studying the financial markets.



Teaching Your Kids Money Management

This article will provide the frame work of my subsequent articles on this topic. In my future articles I will take one of these points at a time and expound upon them, providing practical application and giving examples of how to make it work for your family.

Start As Early As Possible: The earlier you can begin the easier it will be for you and them. If this is new for you and your kids are older, it’s still not too late. Depending on their age, you will need to sit down with them and explain how and why you are changing the way money is handled in the family.

Change the Way They View Money: The first thing you will want to do is to change their view about where the money comes from and whose it is. If they believe it is coming from you and there is an endless supply, they will treat it accordingly and happily spend you into the poorhouse if you allow it.

Get Rid of Allowances: Tie their income to specific functions they do around the house. If they do their assigned tasks, they have income, if they don’t do their tasks, they don’t have income.

How Much is Enough: Consider how much you are already spending on their needs, wants, and desires and make that part of their compensation. Be sure to keep it in line with their age and abilities. Make it so they will need to make decisions based on what’s important to them.

Establish a Spending Plan: For younger kids, help them set up a very basic spending plan. Have one fund for savings. This will be for those big ticket items. Have one fund for general spending on the day to day items. Have a fund for charities. It is important for them to understand that life is bigger than they are and we have a responsibility to others.

As they are ready, re-evaluate their plan and work with them to make age and ability related adjustments to their income, house responsibilities, and what purchases they are responsible for.

Let Them Manage It: Once you have established where the money comes from, let them have the responsibility of managing their money. You will be amazed as you watch their attitude change toward the value of money once they realize the supply is limited and they are in control of where it goes.

You Must Be Able to Say, “No”: This is where it can get hard for some. You will need to be able to say, “No. ” And you will need to be able to watch them make mistakes without bailing them out. If you can not do these two things, your child is not learning what he or she needs to be successful in this area.

Savings Will Save Them from Disaster: For kids there are really two basic reasons for saving money. One reason is to save up for a specific purchase, like a more expensive toy, bicycle, a game system or a car. The other reason is to be prepared for unexpected purchases. Mastering how to save will help to convert a spending plan disaster to a simple decision.

Giving It Away Will Help Them Grow: Show them there are more important things in this world than them by giving to a greater cause. Helping them see the value of using their money to help someone else less fortunate will expand the scope of their view from an “it’s all about me” attitude to one of “I can make a difference in the world around me”.

It’s OK to Talk About Money: As your children become more familiar with the principles of money, include them in some of your spending plans. You don’t have to talk about specific amounts or income but you certainly can solicit their input while making decisions.

Tell Them About Your Choices: It’s OK to share with them the things you did right and the things you didn’t. They can learn and grow from your mistakes. And they will feel closer to you because you were willing to share with them.

Teach Them About Compounded Interest: This can work against them or for them depending on the choices they make. Borrowed money makes them a slave to the lender.

Don’t Give Up and Don’t Give In: They will beg and plead; they will try to manipulate you and push your buttons; they might even try to make you feel guilty. Regardless of their tactics, do not relent. They will learn more from your doing than from your saying.



Top 3 Money Management Tips on How to Ruin Your Financial Life!

Who needs  money   management  tips on how to ruin their financial lives? Please raise your hand. No one? This is certainly a surprise. Given the many people with  money  issues when we look around our families, relatives, friends, and associates, I cannot help but wonder that some of them actually did receive  money   management  advice of this nature. Whatever it is, in case you are still keen to ruin your financial life, follow these top 3  money   management  tips for beginners and you can be sure to get the results!

First, forget about setting  money   management  goals to address any financial concern. Why? Let me ask you a question. How many New Year resolutions have you made, and how many of them have you kept? Come on, be honest with yourself. See? That is exactly why trying to set a  money   management  goal is a waste of time other than a way to kill off some brain cells.

I am not saying you cannot have dreams of retiring at Bahamas and living the good life one day or something. Sure you can. No one is stopping you. Just do not waste time and energy going into the specifics like when you want to retire, how much money you need, and what investments will help you get there.

By the way, always dream big. Do not sweat the small stuff–small money included. Having the discipline to save for a TV or car purchase is unnecessary and could be bad for you. The satisfaction of achieving a smaller cash objective can be addictive. It motivates you to do more and more of it and that means work. There is absolutely no need to train yourself to build up funds little by little. All you need is a big win on the lotteries or horses you bet on to take care of everything.

Since we touch on the subject of savings, I might as well give you the second of the  money   management  tips to wreck havoc on your personal finances: Savings is the last item you need to put on the shopping list. Spend all the money to your heart’s desires regardless of your income resources. Whatever cash you have left–not that it is likely to happen if you heed this advice–at the end of the month can then go into the savings account. Putting aside a fixed amount or percentage of your money first only keeps the bank accounts growing and growing. What good can those savings do?

You do not need an emergency fund for sudden medical bills. You are in the pink of health. No worry of unexpected illness striking, isn’t it? What about car accidents? Well, they only happen to the other unlucky folks. Besides, your driving skills are superb. You have zipped along the highway at 200 miles so many times without trouble. How about saving for retirement investment? Perhaps, except that you are still young and retirement is a long way ahead. It is not too late to start retirement planning 30-40 years down the road when you are in the 50’s or 60’s, right?

Instead of paying yourself first to build up the savings, think of all the fun and entertainment you are missing! So shop till you drop and enjoy life to the fullest with every penny you have.

Now is the perfect time to introduce the third and last of the top 3  money   management  tips to crash your personal finances: Never ever track your spending. You do not need to be reminded of your impulse purchases or bad spending habits which a good record system will reveal. Paper notebooks are for idle doodling and are not record books to track expenses. Computers are meant for games and online chats. Personal budgeting software like Quicken or Microsoft Money are best left to the accountants and have no place on your laptop.

So, what if you overspent and ran out of cash? No problem. The almighty plastics can take care of it. Simply whip out a credit card and charge your expenses to it. If need to, you can always apply for another one to extend your credit further. They are not called the credit cards for nothing you know.

How about all the credit card debts you owe? No problem there either. After all, you can just pay the minimum monthly and push the remaining balances away for yet another month. The banks can slap all the interests and penalty fees they want on the outstanding balances. No hurry for full repayment so long as you do not have to pay it now.



Money Management – Playing It Safe

However the best money management system in the world is not going to help unless you have a successful trading method. Understanding money management methods will assist in creating the successful trading method you use and can increase profits by reducing unnecessary risk. Once you realize that a stop loss must always be in place then position sizing can become a reality. The end goal with money management is to create a smooth equity curve.

So what’s with the money thing? What’s the secret?

You just need to sort out what’s right for you within a mathematical framework.

There are different models you can use from any of the three wise men quoted above, and, there are others such as Van Tharp (Ryan Jones is also an expert but he seems to accommodate larger drawdowns and Ralf Vince who can get a little complicated). You can catch Van Tharp later this year in Melbourne and Sydney.

The beautiful thing about money management is that mathematics don’t lie. Good money management breaks down your trading into mathematical units so you can identify your strengths and weaknesses in your trading. You will need to make your weaknesses your strengths or failure will follow.

Keeping it simple – the “2% rule”

Only risk 2% of your total capital per trade! Some say that’s too much and others say that’s too little.(if you would like more info on the 2% rule and leverage please email me) 2% is a so so tarting point for risk if you are having 50% success with your trades, if not use 0.05% – 1.00%

Quick example

Account Size: 10,000

WSA Trading at $2.20

Stop Loss at 1.95

The difference equals risk = $0.25 cents

Risk 2% of Total Acct: 10,000

Equals = $200.00

$200.00 divide $0.25 = 800 shares

Total Risk $200.00

To try a little more advanced management model use Van Tharp’s model to work out what he call’s his ‘R Multiple’. R simply means Risk, the risk you’re willing to give a trade.

If say your dollar risk on your first trade is $200 then that is equal to 1R, if you lose your risk capital ie the $200, then you need to express that as a negative -1R. If you created a profit of $200 then you express that as positive 1R, If you created $300 profit then it would be expressed as 1.5R and a $400 profit expressed as 2R and so on, the same for larger losses. Lets say after 20 trades, you need to add up all the positive R’s and subtract all the negative -R’s. Once you have the balance expressed in R multiples, lets say 15 R you can then use this figure to work out your Expectancy, that is, your future earning per dollar invested. To get the Expectancy you need to divide your R Multiple into the amount of trades, in this case 20 trades. Divide 15R into 20 trades = 0.75 Expectancy. This will tell you how good your system is.

When to risk more

Lets call your current trading capital Base Capital, and you only ever risk 2% of that. But you wish to take higher risks now. Well then you can risk more only on your current profits, profits that have not been returned to your Base Capital as yet. As Base Capital rules only allow you 2% risk. So what percentage of current profits should I risk?

One logical way of doing this is to divide your expectancy into your R multiple eg 0.75 divide 15R = 5%.

So at this stage Risking 2% of Base Capital, and risking 5% of profits. The question of when to return your profits to Base Capital could be from time, percentage, dollar value or goals achieved etc.

There are further aspects including: smoothing out your equity curve; and, scaling into and out of positions at break even points with 2% risk; both of which would enhance your money management model.

Essentially trading accounts are lost because of large losses/over exposure and are not of the 0.5 -2% risk management ratio.

Once you find a trading method that suits your personality, you will need to put it to the test, experimenting and practising with a risk percentage of half of one percent is the norm. A good mentor would make you practise until you could prove that you have all aspects under control. Establishing the discipline to have a stop on all trades in the derivatives market is imperative, followed by position sizing.

A few good friends of the Trading Lounge have completed an excel spreadsheet that will update CFD’s /shares etc every 15 minutes along with working out Multiple R’s, Expectancy, win / loss ratio, dollar and % risk, dividend, etc. it’s not perfect but it a great start for free, there is a limited manual for it. I’m sure it will help get your expectancy accounting on track. You’re welcome to download it.

Further reading: Van Tharp, Ryan Jones and Ralf Vince are three more excellent authors on money management.



Money Management – Martingale Type Strategies

Martingale type of strategies state that as the value of an account is decreasing, the size of the following trades increase. As the account suffers losses, the trading size increase in order to cover the losses.

This type of money management strategy is practiced in gambling where the systems or the games are negative expectancy. No type of money management can change the odds of the game or change the expectancy of the system. A simple example is a coin flip.

You can bet on heads or tails. If you win you win 1$ and if you lose, you lose 2$. This is negative expectancy. If after 100 flips, you have 60 heads and 40 tails, you will win 60$ and lose 80$ netting a loss of 20$.

Although you won 60% of the times, your wins were half the size of your losses. However, by practicing martingale, you can increase your bet size after every loss to 2$ to win 2$, in this case if a streak of wins start, you can manage to come up as a break even player.

This type of money management is highly dependent on streak of consecutive wins. Classically, the gamblers or traders try to take advantage of the streaks in the game. However, this is not going to change the negative expectation of the game. Any losing streak lasting for long enough will chew up the capital.

The theory behind doubling of size of the bet is that eventually the losing streak has to come to an end. I do not recommend this method of money management in forex, stocks, options or any other type of trading. The risks are too great and there is a good chance that 4-6 or more losing trades will ruin the account.

There are other better money management techniques which are antimartingale in nature. This will be discussed further in my other articles on money management techniques here on EzineArticles.



Personal Finance Money Management Guide For 2010

Saving more than a couple of thousand dollars is not as difficult as it sounds. I am not going to harangue you on “you can do it”, or “importance of saving”, or “why not saving can kill you before the world ends in 2012.” No. Nothing like this. Here are few suggestions on how you can actually save few dollars, if not couple of thousands, next year.

1. Calculate the amount of money you spend buying kitchen paper. It may not be quite substantial, but why waste money on these papers when you can replace them with cloth napkins. Spending even a dollar on disposable papers seems to be a waste. Buy a cloth that can be washed and reused. You can save approximately $85 a year.

2. If your family comprises of you and your spouse, both working, why spend so much on cable. Unplug it and save anywhere round $600 per year.

3. Digital camera is perhaps the only device where we use batteries. If you use it a lot, switch to rechargeable batteries. Doing this will save not much, maybe $24. But every penny saved in this kind of economy is 3 pennies earned.

4. Why do we need a landline when all the family members own a mobile phone? I have disconnected it and I sometimes use Skype instead of landline, and mobile most of the times.

5. If you are still left with any gold after, after the “sell gold” advertisements, sell it off. Even if it is small gold scraps, sell it. But do not mail it across. It is better to sell it at the neighboring jewelry shop. You can earn some amount here.

6. Chopped and shredded vegetables, cheese, and fruits cost much more than the un-chopped, fresh ones. Instead of spending more, you can get the fresh ones and slice it at home. Doing this for a year can help you to save $250. Isn’t it worth a try?

7. Stop going to the gym and find a way to exercise free of cost. If the only reason you go to gym is losing weight, there are numerous ways to do it without a gym. By doing this you can save as much as $420 in a year. Till now, this is the biggest contributor to your saving.

8. Get rid of your printer. Okay, may be that’s not possible, you can at least promise yourself not to print unless necessary. Ink cartridges, color or black & white, can burn a hole in your pocket. I have to replace the cartridge once a year. However, it still costs me around $80 to $100.

Remember these points while preparing a budget for 2010. These are just 8 examples of saving money. We, together, can come up with probably hundreds of them, and imagine the amount we could save. If you have any such suggestion, please comment and suggest, for me, for all the readers. Let’s derive the most comprehensive and precise personal finance  money   management  guide for 2010.