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Ok. Let's talk money management. From the sound of it, the money
management schemes should be more highly prized than actual trading systems
since many believe (as do I) that this is just as critical if not more
critical, than timing.
I'd like to know how some of you determine how many contracts to buy and
how much to risk on each trade. The old adage of risking only 1-2% of
capital base is fine if you're trading with $1x10^6 dollars but if you're
trading with a relatively small account ($30,000 or so) the only way to get
larger is to push it (trade more than 1-2%)
Do you average down? Averaging down, even during the day, makes me shiver.
Subconsciously, I can't handle it. So far I've listened to that little
voice. However, many, many times it would have worked out. If you
incorporate a few strict rules around an averaging down plan, couldn't it
work?
Perhaps limiting your averaging down in strong trends when you're buying
retracements would work over the long haul?
Are there any day traders that like to average down so they can exit
loosing position gracefully? If so, what are the rules you follow?
Some floor traders will average down as much as twice, each time doubling
their loosing positions. If it still doesn't work out by then, they cut it
all and have lost a bundle. Physiologically this would be hard for me to
come back from.
As for me, my money management is a mix of science and art. My stop point
determines where I get in. The quality of the signal determines how much I
risk. For instance I'll give more weight to a solid inverse head and
shoulders pattern than I will a spike up amidst a hard down. A dead cat
bounce is a high probability trade so I'll usually load the boat. I'm
always risking at least 5-10%. Anything less, and I'd have to trade
Midams.
I have what I think are tight stops. 4-8 points in bonds. 1-2 points in
SP. This may seem unreasonable to some but I've found that it's easier for
me to come back after taking small losses than waiting around for a loosing
position to come back. Taking small losses is how all the pit traders I've
talked with trade (3 people). It makes sense but is harder than doing
nothing. I've played the waiting game before. It's hell. I feel stupid
when I wait for something to come back. This has hurt me more than once.
I may exit an eventual winning position prematurely with a small loss, but
I'm assured of staying in the game. My timing is not so bad that I know
within the next few trades I'll have a winner or two.
Sometimes I like to stop and reverse. I can't count how many times I would
have made back everything I'd lost plus a ton more if I had a consistent
stop and reverse policy. How do you feel about that? Have any of you
incorporated this into your methods?
Do any of you out there (position traders mainly) "push" your winners? How
important do you feel this is to your success/failure? Some systems call
for adding to winners in a 3:2:1 fashion. Buy 3 as your base, when the
market's confirmed your entry, add 2 more, then upon further confirmation
add 1 more, etc. Has this worked for you? Has it failed?
I think diversity is extremely important. Both technically and
psychologically. I used to believe that it was better to put all your eggs
in one basket so that when you were right, you were really right! But this
never seemed to work for me enough. Staying diversified seems to work. I
like at least 3 markets in my position trading portfolio.
What are your thoughts on this?
The discussion's open. I will value your feedback.
Thanks,
Brian.
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