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Tony Parker wrote:
>
> Scot:
>
> I couldn't agree with you more. I'm the first to admit I'm a rank "Newbie", but it
> didn't take long for me to notice
> that money management is a totally forgotten important aspect of a good trading
> methodology.......
Tony,
Hopefully, you should be able to find some good suggestions right
here on RT. :)
As a start in building a proper money management style, the following
sources and formulas will start you off in the right direction:
"The Elements of Successful Trading" by Robert Rotella.
There is a wealth of trading and MM ideas in this book.
Use of the following formulas and approaches is a good idea:
1. Present your equity in "Price Chart" format, and review it
just like you would any stock or commodity, then ask yourself
"Am I a Buy or a Sell?" You can also trade your systems just like
any commodity, loading up when your equity "chart" breaks out to
the upside ..... etc.
Run your equity curve through standard deviation formulas to
determine standard account fluctuations. Are your results prone
to volatility spikes and/or large inconsistent swings?
All systems within your account should pass the minimum acceptable
levels as used in the following formulas:
Using these formulas also "scales" the trading to the size of your
equity.
ROR (Risk of Ruin)
Sharpe Ratio
(Formulas and suggestions for use can both be found in Rotella's
book.)
It's also a good idea to run your systems through the Z-score
statistical run engine (As mentioned in TASC a few issues back. If
you don't subscribe, let the list know, I'm sure a ton of traders
have the formula.)
Summary
The Goals of Proper money Management
1. O risk (Unattainable but it doesn't hurt to get as close as
possible.)
2. Smooth Upward Equity curve (No Spikes, or at least no DOWNWARD
spikes. )
3. not *losing*.
The Means:
Equity can be treated as and traded like a stock or commodity.
Standard Deviation isolates inconsistencies.
ROR (Risk of Ruin) formula and
Sharpe Ratio can scale risk and trading levels to size of equity.
Z-score isolates tendencies of a system's winning and losing streaks.
All geared towards *consistency* and *not losing*, the halllmarks of
the professional trader.
Walt Downs
CIS Trading
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