A Trader's Money Management System: How to Ensure Profit and Avoid the Risk of Ruin

210 Pages·2008·3.09 MB·english

by  Bennett A. McDowell

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A Trader’s
Money
Management
System
How to Ensure Profit and
Avoid the Risk of Ruin
BENNETT A. McDOWELL
John Wiley & Sons, Inc.
i
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iv
FM JWBK182-McDowell April25,2008 15:7 CharCount=0
A Trader’s
Money
Management
System
How to Ensure Profit and
Avoid the Risk of Ruin
BENNETT A. McDOWELL
John Wiley & Sons, Inc.
i
FM JWBK182-McDowell April25,2008 15:7 CharCount=0
Copyright(cid:1)C 2008byBennettA.McDowell.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
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LibraryofCongressCataloging-in-PublicationData:
McDowell,Bennett,1957–
Atrader’smoneymanagementsystem:howtoensureprofitandavoidtheriskofruin/
BennettA.McDowell.
p. cm.–(Wileytradingseries)
Includesindex.
ISBN978-0-470-18771-5(cloth)
1.Investmentanalysis. 2.Speculation. 3.Riskmanagement. I.Title.
HG4529.M386 2008
332.64’5–dc22 2008006155
PrintedintheUnitedStatesofAmerica.
10 9 8 7 6 5 4 3 2 1
ii
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Thisbookisdedicatedwithaffectiontothememoryofmyfather,
RobertAdamsMcDowell,andtomymother,
FrancesFurqueronMcDowell.Iamthankfultoyouboth
foryourguidance,love,andsupport.
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Contents
Foreword vii
Preface ix
Acknowledgments xi
Diclaimer xiii
INTRODUCTION This is My Money Management System 1
PART ONE Psychology of Risk Control 7
CHAPTER 1 It Just Ain’t Sexy! 9
CHAPTER 2 Confidence in Your Plan 15
CHAPTER 3 Yin and Yang 23
CHAPTER 4 Risk Psychology and The Trader’s Mindset 31
PARTTWO Stop-Loss Exits 37
CHAPTER 5 Not Every Trade Will be a Winner 39
CHAPTER 6 Entry Rules and Your Trading System 45
CHAPTER 7 Stop-Loss Exit Rules 55
CHAPTER 8 Scaling Out and Scaling In 65
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vi CONTENTS
PART THREE Trade Size Does Matter 73
CHAPTER 9 Using Risk-of-Ruin Tables and the Optimal
fFormula 75
CHAPTER 10 Using the Two Percent Risk Formula and
Proper Trade Size Formula 83
PART FOUR Record Keeping and Profit/Loss Analysis 89
CHAPTER 11 Tracking Profit and Loss Results and
More Formulas for Success 91
CHAPTER 12 Using Trade Posting Cards and Ledgers 99
PART FIVE Design Your Own Plan 131
CHAPTER 13 Know Thyself—Your Risk Profile and
Discipline Profile 133
CHAPTER 14 Risk Management Rules to Choose From 139
Epilogue 149
APPENDIX A Getting Started with Your Trade Size
Calculator Software 151
APPENDIX B The Trader’s Assistant Record Keeping
System 153
APPENDIX C The Art of Paper Trading 167
APPENDIX D Resources 173
Glossary 179
About the Author 203
Index 205
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Foreword
I
f you use technical analysis, you are likely—or will be likely—to use
candle charts. This is because candles can be used in any time frame
and in any market, and they allow traders to spot turns before poten-
tiallylargemoves.
AstheonewhorevealedthischartingmethodtotheWesternworld,it
isgratifyingtoseeitspopularity.However,withthecandlecharts’univer-
salavailabilityandwidespreaduse,therecomesadownside—mosttraders
areusingthemincorrectly.Thatisthereasonmyfirmhassuchastrongfo-
cusoneducation(www.candlecharts.com/free-education).
One of the most dangerous and common misuses of candles is trying
tousethemasastand-alonetradingvehicle.Thisiswrong.Candlesarea
tool, not a trading system. This is why I also show how to combine can-
dles with Western technical tools and to always incorporate risk/reward
analysis.
Equally important is money management—that is, proper trade size.
For example, what is the proper trade size to enter a position? How do
youscaleintooroutofatrade?Howdoyouadjusttradesizeforyourrisk
tolerance level? These are important questions, but they are beyond the
scope of my expertise. That is why I am pleased to strongly recommend
thisexcellentbook.
Basedonworkingwithsomeofthetopinstitutionaltraders,Icantell
youthatmanyofthemostsuccessfuloneshavehadmorelossesthangains.
Howdidtheyaccomplishthis?Theanswerisbythejudicioususeofstops
andpropertradesize.Soifyouarepickingupthisbook,congratulations:
Youhavetakenthefirststepsinfollowinginthefootstepsofsuchsuccess-
fultraders.
There is a Japanese Samurai saying, “He whose ranks are united in
purpose will be victorious.”Bymergingthetimingadvantagesofcandles
vii