THE ELEMENTS OF MONEY MANAGEMENT

GOAL SETTING - Decide what your trading style and objective is as well as your personal risk tolerance.

HOW MUCH MONEY TO RISK - The total amount you risk at a given time in a particular market or on a particular trade should be based on a percentage of your total trading equity. Exceeding your allocation parameters can result in over exposure.

DETERMINATION OF RISK/REWARD RATIOS - Deciding what the potential loss or profit might be for a trade, as well as the probability of success or failure, will help direct capital toward trades with the best chance of winning.

STOP/EXIT TYPES

BREAK-EVEN - The break-even stop is the most common and easiest stop to use. This stop ensures that you will only lose your (PIPs) if the market moves against you. When you enter a position, your initial stop will be placed. You should realistically give yourself enough room so the trade can work.

TRAILING - The trailing stop is one of the more popular stop methods. Trailing stops have the advantage of keeping you in a trade as the market moves in your direction. You continually adjust your stop up or down to protect your profit. A moving average is also an excellent way in determining where you place and adjust your trailing stop.

PROFIT OBJECTIVE - Profit objective stops are predetermined levels at which a trader will exit the position. If you are going to use profit objective stops, a reminder that you have to be ready and willing to handle watching the market rally well beyond your objective. It can be very tough emotionally, bagging 40 PIPS in the Euros when the market moves another 60 PIPs in your favor. But, the benefit is that you will be more confident knowing that your system will produce many more winners than losers. You are hitting singles by design.

TIME - A time stop is simply placing time limits on your trade for it to work out. The basic premise is that the longer you are in a trade, statistically you have a reduced likelihood that the trade will succeed. The best trades typically work out immediately.

VOLATILITY - A volatility stop depends on recognizing that your risk level is increasing due to rapidly rising market volatility.

BARRIER - The barrier stop is taken when the market touches or penetrates some barrier, such as a point of support or resistance, a trendline or a retracement level.

SIGNAL - Signal stops are positioned in order to alert you that the current move ls contrary to your current position.

WHAT THE MARKET WIZARDS SAY ABOUT LOSING

"I’m always thinking about losing money as opposed to making money. Don’t focus on making money; focus on protecting what you have."
- Paul Tudor Jones

"If you have an approach that makes money, then money management can make the difference between success and failure...

... I try to be conservative in my risk management. I want to make sure I’ll be around to play tomorrow. Risk control is essential."
- Monroe Trout

"Always use stops. I mean actually put them in because that commits you to get out at a certain point."
- Michael Marcus

"If you personalize losses, you can’t trade."
- Bruce Kovner

"The elements of good trading are: 1. Cutting losses. 2. Cutting losses. 3. Cutting losses"
- Ed Seykota

"While it’s essential to respect the market to assure preservation of capital, you can’t win if you’re fearful of losing. Fear will keep you from making correct decisions."
- Howard Seidler

"The best traders have no ego. You have to swallow your pride and get out of the losses."
- Tom Baldwin

"You should always have a worse case point. The only choice should be to get out quicker."
- Richard Dennis