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Money Management et al


Day Trader brought to light the often overlooked paradox of not making money an issue during trading, or having lofty and unrealistic expectations concerning how much money can and should be made on any given day, on any one trade or annually. I agree with it. Though put simply: we trade because we love to and don't trust anyone to invest our money.

Whether you're a beginning trader trading 1-5 contracts or a seasoned investor managing your own portfolio pyramiding scaleout orders of 500 contracts or more, stringent money management rules must be set if you want to protect your principal while adding capital.

Outside of the obvious, the first question that you should ask yourself is Why am I trading? In other words, what are your goals? Are you one who with your unstopable trading plan out to own half of the U.S. Senate? Perhaps you are a noviciate more concerned with retirement, being already employed, after affording you and your fiancée's starter home. The embelished examples aside, you fit in somewhere. Find out where.

Next, can you afford to trade? And are you a good enough trader to rely on trading for monthly income?

Let's break down the first question: Minimum brokerage house margin requirements trading eminis are between $5000 and $10,000, and that's not factoring in insurance on each contract traded, at around $500 to $1000 per contract. Nor does this include equity. Broker's commissions on every order placed varies between $5-$25 roundtrip, id est, to enter and exit a trade. Your trading platform, data feed to the exchange your instrument espouses, the exchange rate and your charting software will average $500 a month, and that's a bargain. Do you have DSL? Do you have a reliable computer, and all the programs and external gadgets free or not needed to keep it reliable? Does your computer have, at least, 2 GBs of RAM? Do you have a cell phone in case power goes out and you need to call your broker to cancel an order like yesterday?

That may be a buzz kill, but being grounded in reality isn't only a good suggestion, it really works.

Chances are great you need a money management schema implemented before you can trade. I had to, most everyone who didn't have life handed to them had to. There's nothing to be ashamed about having to face these facts, but please do face them. The sooner that you do, the quicker you can begin to trade.

When you do begin, and by that time you will likely be near divorce (kidding) with a handful of reliable patterns and countless hundreds of hours in trading simulation, here's where I suggest you start to manage your money wisely:

First you need a solid margin-to-equity ratio, and you need to maintain it while adding to it. What do I mean by this? Say your brokerage minimum is $5000 to trade ES, and you only had $5000 in your account. That's a 100% margin-to-equity ratio (margin divided by equity). That's not as good as it sounds. A few trades gone bad and you're already due a margin call. That's not a good place to be.

I suggest starting at a ratio of at least 50% but preferably 1:1. If you begin to find that you're having to add money to maintain equity then you can close the account, be able to afford to pay your bills while finding employment and still have enough money to find a better trading course. It's reality.

Let's assume that alas you've found your soulmate trading strategy and are maintaining your MER. I get asked a lot by friends or aquaintances when they should add contracts to their account, or open additional accounts for other instruments in various markets, and the answer is always the same: As soon as you can afford to and eat. And never stop adding contracts.

At the first if you're like most everyone when they began then you'll be trading one instrument for monthly income. As soon as you can meet your societal obligations by paying your monthly bills, have additional monies left over, and have doubled your MER, it's time to begin thinking about diversifying your portfolio. Ideally you want to be in a position to be in all markets using the same money management model referred and in double or more at the time's hedge market. There's always a hedge market. Find it and station yourself there until it dissipates, or shows signs of crashing, and begins elsewhere. When it moves, downsize to 50% or 1:1 MER.

You may be asking yourself How much of my equity should I risk on any given trade? That really depends on what type of trader you are. Are you agressive? Conservative? 10% or over is definitely agressive. 2% is conservative.

If you're a trading hobbiest then this model likely isn't for you, but it is if you want to leave behind a legacy for loved ones.