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The Two Edged Sword Yesterday I was doing some maths and looking at my trading performance, and I realized that my money management system was FUNDAMENTALLY FLAWED. At the same time I had ideas about how to fix it so that it will be my friend instead of my enemy, and thus I have decided to not trade the last 2 days of March until I have modified my money management system. If your trading life has been unsuccessful so far I suggest that you read this post carefully. First of all, let me propose to you a radical idea:You may be a good enough trader already... To understand this, you have to begin to think in terms of statistical averages such as gain/loss ratio, average number of winning trades to losing trades etc. In a nutshell, I figured out that my money management system was structured such that in order to be profitable in the long term I have to have over 90% winning trades consistently. In other words, I have to be one of the best traders in the world in order to make profits. This would also explain why so many people fail in this subject. Their whole focus is on trying to beat a system they CANNOT beat statistically. No wonder this month I had a 17.3% drawdown (but like a smart guy I am working this all out on my micro account, so the total loss in real dollar terms was a mortifying $12.30, approximately the same amount that I spent on lunch. Remember, its percentages that count - to be trading your life savings before you are showing consistent gains is IDIOTIC. So until you can show consistent gains MoM GET YOUR ASS ON A MICRO ACCOUNT)!!! Your life goals are just going to have to go on a backburner until you sort it all out - thats just a plain fact. Otherwise you may as well cash out all your funds and go flush them down the toilet). Back to me, the problem in my case is NOT my trading so much, it is in my money management system which is currently operating like a car with one wheel. To get your head around this, you HAVE TO learn to think in terms of statistical averages. Lets take stop losses for instance - you know that if you have a tight stop loss, your number of times getting stopped out goes up. But if you have wide stops, then the number of trades it takes to recover from getting stopped out may be large enough that you never recover before the next one happens. Therefore, there is a mean statistical perfect stop loss size for any particular trading strategy you use, or else the odds are stacked against you. You have to KNOW what that number is, or else you are trading blind. All of these numbers and factors are one edge of the sword called Money Management System. You have to fine tune it like a racing car engine or else you are in essence trading against your system. If you get it right, your money management system will swing the odds in your favour and contribute to your success - but if it is in chaos then it is your enemy. Therefore I plan not to trade the next two days, because it is simply pointless - and I will be focusing on implementing the changes to my money management system that have to happen in order to correct the gaping holes in it I've identified. |
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