Money Management Techniques & Economic Reports 11.21.2014

A word or two about day-trading and money management…..

Trading futures and even more so, day-trading futures has grown significantly over the last few years, as seen by the increase in daily volume on some of the more popular electronic markets.

New traders as well as more experienced traders often wonder and search for the perfect solution. The answer is different for each trader. Many factors influence what may be a good route for one trader versus a better alternative for another. Experience, risk tolerance, the person’s schedule, financial situation along with other factors will greatly influence trading decisions. What’s good for one trader may not be right for another.

One COMMON solution different traders can implement when it comes to day-trading is the principle: “Treat your daily Profit/Loss as you would treat an open trade.” Allow me to expand:

As brokers we have seen different traders survive in this business, making progress and even getting to the point of consistently finding their set ups. Their main downfall is that “one bad day” where they may give up recent gains, lose a large percentage of their account or even lose their whole account.

A practical solution for eliminating those disastrous days and giving you a better chance for survival is to always use stop losses, trailing stop losses and daily stop limits for every single trading day.

Let’s assume, hypothetically, that trader A is day-trading with $10,000 of risk capital. Part of his/her preparation for trading should involve understanding his/her trading style, knowing how active a trader she is, how much on average he/she is willing to risk per trade. Defining these factors will help him/her calculate what the DAILY LOSS LIMIT should be. Therefore, if you are disciplined enough to set your own daily loss limit and adhere to it carefully, you will give yourself better odds of surviving the day-trading arena and preventing catastrophic days where you may lose a large portion of your account. Surviving to trade another day is a crucial part of day-trading.

The next step, now that we have decided on what our “daily stop loss” should be is to identify which level of profit will trigger “BREAKEVEN MONEY MANAGEMENT”? By that I refer to a level of daily profit that you have achieved as a trader and at that point should trigger the concept of “I am up $X amount today. If for whatever reason the rest of my trading for today is not going well and my daily profit/loss is back to zero, I should call it a day.”

Moving on, we should also decide on a certain profit target (higher than your “breakeven point” ). That level of profit, when and if achieved during the trading day should trigger a corresponding “TRAILING STOP”. For example, let’s assume that trader A is now up $1,000 during the trading day and after implementing the new daily risk management strategy, has decided that if he/she is ever up a $1,000 during the trading day, his/her trailing stop is $500. That means that trader A will continue to trade as long as he/she does not give up more than $500 from intraday gains. By implementing this technique a trader allows himself to continue trading as long as he or she does not give up too much of their profit for that day.

Last but not least is the “PROFIT TARGET”. There are a few schools of thought when it comes to “daily profit target”. Some say that if a trader is “hot” he/she should continue trading in order to maximize the potential for that day. I disagree. In my opinion setting a DAILY PROFIT TARGET based on your account size and other factors discussed previously will serve you better in the long run. In this example if trader A decided that his/her daily profit target is $2,000 and on any given day has reached that profit, that should trigger a feeling of satisfaction and achievement and at that point trader A would close open positions, enjoy his or her good trading, and call it a day.

It is my opinion that a trader will fare better in the long term by initiating these concepts I borrowed from trading system design. Getting to the point of working with these suggestions requires one to analyze himself as a trader, understand basic concepts of money management, and have the SELF DISCIPLINE to execute his or her trading plan.