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

210 Pages·2008·3.09 MB·english
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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 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. PublishedsimultaneouslyinCanada. Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedin anyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,oroth- erwise,exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyrightAct, withouteitherthepriorwrittenpermissionofthePublisher,orauthorizationthroughpayment oftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222RosewoodDrive, Danvers,MA01923,(978)750-8400,fax(978)750-4470,orontheWebatwww.copyright.com. RequeststothePublisherforpermissionshouldbeaddressedtothePermissionsDepartment, JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030,(201)748-6011,fax(201)748- 6008,oronlineathttp://www.wiley.com/go/permissions. LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbest effortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespecttothe accuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimanyimplied warrantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarrantymaybecreated orextendedbysalesrepresentativesorwrittensalesmaterials.Theadviceandstrategiescon- tainedhereinmaynotbesuitableforyoursituation.Youshouldconsultwithaprofessional whereappropriate.Neitherthepublishernorauthorshallbeliableforanylossofprofitorany othercommercialdamages,includingbutnotlimitedtospecial,incidental,consequential,or otherdamages. Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,please contactourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outsidethe UnitedStatesat(317)572-3993,orfax(317)572-4002. Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappears inprintmaynotbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts, visitourWebsiteatwww.wiley.com. 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 FM JWBK182-McDowell April25,2008 15:7 CharCount=0 Thisbookisdedicatedwithaffectiontothememoryofmyfather, RobertAdamsMcDowell,andtomymother, FrancesFurqueronMcDowell.Iamthankfultoyouboth foryourguidance,love,andsupport. iii FM JWBK182-McDowell April25,2008 15:7 CharCount=0 iv FM JWBK182-McDowell April25,2008 15:7 CharCount=0 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 v FM JWBK182-McDowell April25,2008 15:7 CharCount=0 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 FM JWBK182-McDowell April25,2008 15:7 CharCount=0 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

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