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Money Management Rules

February 8, 2007

You may be filled with knowledge about trading or have a sound trading system using the latest technical indicators, but most professional traders will tell you that the single, most important factor in futures trading success is using good money management principles. A higher percentage of winning trades or yet another trading tool may be helpful, but if you do not have a good money management plan in place for trading futures, you are not likely to remain in the trading game very long. You need to develop your own money management program for entering or exiting markets, sizing your positions, etc. based on the size of your account and your trading style, but here are some principles to guide you, listed in no particular order.

1. Bulls make a little. Bears make a little. Pigs get slaughtered.

In other words, do not be a greedy trader. If you are a bull, don't expect to get in at the bottom and out at the top. If you are a bear, don't expect to pick an exact market top and ride a market all the way down to the lowest low. Thinking otherwise allows the destructive "greed" emotion to take over. Greed has been the ruin of many traders.

2. Any fool can get into a market, but it's the real pros that know when to get out.

Indeed, market entry is certainly an important element of successful trading. However, exiting the trade is paramount. Many times a trader will allow a market to "go against" him or her for way too long and way too far--meaning big trading losses. See next item.

3. Use protective buy and sell stops.

One of the major mistakes many traders make is not using protective buy and sell stops when they enter a trade. Or, traders may pull their protective stop, "hoping" the market will turn in their favor. Don't be fooled into using "mental stops." Determining where to place protective buy and sell stops BEFORE market entry is one of the best money-management tools available.

4. Don't put all of your eggs in one basket.

Using a large percentage of your entire trading account for one trade is unwise. Remember that even professional traders will have more losing trades than winning trades over time. The key to success is minimizing losses on the more numerous losing trades and maximizing profits on the fewer winning trades. See next item.

5. Cut losses short. Let winners ride.

Using a pre-determined protective buy or sell stop will cut your trading losses short. Using a trailing protective stop on trades that become profitable will allow you to maximize profits on the winning trades.

6. Only the markets know for sure.

Don't ever think you "know" what a market will do at any given point in time. One of the biggest advantages for sound money management is "knowing that you don't know" what a market will do at any given time. A recipe for trading disaster is thinking you know that a market will do. Remember the old trading adage: "Markets will do anything and everything to frustrate the largest amount of traders."

7. Be humble.

When trading profits are taken, be glad that it was not a trading loss. Don't grouse because you left a bunch of money "on the table" after you exited your winning position.

8. On selling options, use caution.

There are some traders who do sell options on futures (as opposed to buying options) and make profits doing it. And there are many traders that don't. I heard a veteran speaker at a trading seminar once say: “I made over 40 trades selling options in a year, with 97% winners--and still lost money.” Remember the old saying that if it sounds too good to be true, it usually is.

9. Don't over-trade.

Trying to trade too many markets at one time is not good money management. If you run into a losing streak, cut down on trading--DO NOT try to trade more markets just too quickly recoup lost money.

10. To succeed at trading markets, one must first survive at trading markets.

Be conservative with your trading account and trading methods--especially if you are a less experienced trader. Go for those "base hit" trades, and don't swing for the fence and try to hit a home run in a trading decision. Traders need to survive to trade another day, if the absorb a few losing trades.
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