My Money and Open Trade Management Style
Thank you for wishing to learn more about my approach to both money management and open trade management – your trading account will thank you thoroughly.
Let’s start with an example to illustrate how I go about it – let’s say I wrote in Stock Trading Signals that:
Trading position (short-term; futures; my take): long positions (100% position size) (entered at 3570) with stop-loss at 3500 and initial upside target at 3700 are justified from the risk-reward perspective.
If you’re using e-mini S&P 500 futures, 1-point move in the S&P 500 amounts to $50. Multiply that with the difference between the entry and stop-loss, and better don’t risk more than 6% or maximum 8% of your trading account on this trade alone.
or in Gold Trading Signals that:
Trading position (short-term; futures; my take): long positions (100% position size) (entered at market, which is 1902 at the moment) with stop-loss at 1850 and initial upside target at 2000 are reasonable from the risk-reward perspective.
If you’re using e-mini gold futures, 1-point move in gold amounts to $50. Multiply that with the difference between the entry and stop-loss, and better don’t risk more than 6% or maximum 8% of your trading account on this trade alone.
The above is a helpful guideline on how to approach risk per trade in order to stay in the trading game for the long run. You may have heard the saying that there are either brave traders, or seasoned traders – and that implies that there are no brave seasoned traders. That’s because sooner or later, some trade is going to go mightily against the open position, and no one wants that to deliver the knock out blow.
So, the above 6% or 8% rule of thumb that I follow, serves as a filter, as an adjustment to every open trade position sizing so that following trades can be mounted with peace of mind and enough spare firepower to let the proven edge shine and bring profits. Trading is a marathon, and the next trade isn’t guaranteed to turn out whichever way – but over time, the profits outweigh the losses considerably, and money management works to make it happen.
In fact, money management is the true Holy Grail of trading. So, this is how I go about it.
- I prefer trades that have their risk and reward sides favorably skewed, and that do not employ a faraway stop-loss, because I like trade ideas to be roughly comparable among themselves
- I mean comparability in terms of a 1-point move in the underlying asset without complicating the brackets position sizing parameter, which is almost always 100% (standardized – I leave different position sizing for advanced money management techniques)
- I see to it that a 1-point futures move in every open position always affects the trading account equally, translating into:
- $100 move in S&P 500 futures / $100 move in gold futures
- $50 move in e-mini S&P 500 futures / $50 move in gold e-mini futures
- $5 move in e-micro S&P 500 futures / $5 move in gold e-micro futures
- a 100-point move at 100% position sizing should match your risk tolerance (the above mentioned 6% or 8% risk per trade, but really no more than 10%), and not result in a greater dollar move in the opening equity
- gains are not reinvested on autopilot, but I reassess changes in dollar allocation per trade on a long-term (annual) basis
- I don’t get carried away after a string of winning trades, I don’t increase the position sizing then, and neither should you
- stop-loss is a protection against worst case scenario – it isn’t set in stone, and indicates level at which it absolutely makes no sense to be in the trade
- my trading style is about active open trade management where both stop-loss and take-profit orders often are updated (or the trade is closed right awat), reflecting the market situation and risk-reward ratio adjustments
- I am generally more than willing to expose around 8% of trading equity in each trade, but due to active open trade management, the actual percentage gets usually much lower – and that’s good, because diligent risk-reward orientation brings about greater stability of returns
- given my long-term win ratio, this starting position sizing allocation per trade is both reasonable and optimal
- remember, professionals have their eyes set not on returns but on risk undertaken, and they exceed thanks to conservative focus on the downside
- it’s my maxim to take care of the risks first, because profits would then take care of themselves much easier
- I am not scaling in or scaling out – my position size remains the same throughout the open trade (unless I employ advanced money management techniques, which I am also telling you about)
If you just joined, have no open (S&P 500 or gold) trade and want to take me up on this one
- your risk-reward ratio is different, because your entry point is different
- if the price has run away from you (making the dollar distance to the stop-loss level too large for your appetite), strongly consider taking a smaller position size
- I rarely expose open profits to an adverse market move (i.e. I protect open profits through updating a trailing stop-loss or exiting the open trade well before it can get hit) as a rule of thumb
- as a result, entering (at market) into the open trade presented above is a good idea, but don’t risk more than around 6% or maximum 8% of your trading equity in this trade
- instead of risking more than around those 6% or maximum 8% of your trading equity in this trade, decrease your position size by half in this first trade of yours – your trading account will thank you should this trade not be a winning one
- remember that risk is the only variable that you can control in the markets, which means that no next trade is guaranteed to be a winner
For SPY and GLD ETF users
- be aware that you you’re not able to enter, exit or even update your trading orders virtually 24/7
- ETFs have much shorter trading hours, resulting in gaps that bring about inconsistent trading results
- to make up for that to some degree, decrease the position size (risk) in your open position by 25% vs. what would it be if you traded a futures instrument
instead, and use the dollar amount of those 25% saved to have a greater cushion in your stop-loss, which gets a bit more breathing room as a result
- more breathing room doesn’t mean that extra space is allowed – active open trade management remains the same as for futures users
- be aware that the SPY equity curve can and will differ from the equity curve when futures instruments are used
- how exactly they would differ, depends primarily upon price volatility and gaps
For sectoral ETF / individual share users and vehicles outside the GLD ETF
- in Stock Trading Signals, I most often discuss technology (XLK ETF) thanks to its heavy index weight
- other sectors might (and do) behave differently, and I usually highlight that in the context of rotation
- my key analytical and trade call focus is the S&P 500, so please for your own sake, don’t automatically translate my calls into the sector / ticker call of your own choosing, and ask my opinion instead
- in Gold Trading Signals, I focus on gold, and look at silver, other metals, gold or silver miners and various ratios only to drive my decisions on gold
- please remember that precious metals apart from gold are moving to their own tunes, which means that my gold signals can’t be extrapolated to other asset classes within the sector
- based on popular demand, I also analyze other assets and commodities such as oil, uranium, rhodium etc, but must receive a fitting question requesting such analysis first
That’s pretty much it! If you have any questions or would like to see more ground covered, please just let me know.
Good trading with confidence,
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