Good Money Mangement

Good money management" is a relative principle. A good money- management practice for one trader might not be a good money- management practice for another. Here's a real-life example: I had a fellow email me a while back, saying he was up $3,000 in a sugar trade, and that his total trading account was $4,000. Although I don't provide specific trading advice to individuals, I told the trader that if I had only a $4,000 trading account and had racked up 3 grand in profits on one trade, I would seriously think about ringing the cash register on that trade and building up my account so that I could withstand those drawdowns and losers that will eventually occur.

On the other hand, if a trader with a $30,000 account had a $3,000 winning sugar trade, he may want to let the winner ride a little longer, as pocketing the profit would not nearly double his trading account, as it would the smaller-capitalized trader.

In other words, don't be a greedy trader. There's an old trading adage that says there is room for bulls and bears in the marketplace, but pigs get slaughtered.

Let me emphasize here there is nothing wrong with starting out with, or keeping, a smaller-capitalized futures trading account. But I strongly suggest that those smaller accounts use the very strictest of money management.

There are dozens of good futures and stock trading books available, and most spend at least an entire chapter on money management.

Here are just a few very general money-management guidelines:

• For smaller-capitalized traders, don't commit more than one-third of your trading capital to one trade. For medium- and larger-capitalized traders, you should not commit more than 10% of your capital to one trade. The guideline here is, the larger your trading account, the smaller your commitment should be to one trade. In fact, some trading veterans suggest larger trading accounts should not commit more than 3-5% of their capital to one trade. Smaller-capitalized traders, by necessity, have to commit a larger percentage of their capital to one trade. However, these small-cap traders may want to trade options (buying them, not selling them), as risk is limited to the price paid for the option. Or, smaller-capitalized traders may want to trade on the Mid-American Exchange, a division of the Chicago Board of Trade that has smaller futures contract sizes.
  • Use tight protective stops in all your trades. Cut your losses short and let the winners ride the trend.
  • Never, never, never add to a losing position.
  • Your risk-reward ratio in a futures trade should be at least three to one. In other words, if your risk of loss is $1,000, your profit potential should be at least $3,000.

  I can't stress enough that survival in the futures trading arena (especially for beginners) should be your top priority.