I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Saturday, January 18, 2014

Money Management or Position Sizing – Part 1: WHAT IS IT?

As frequently mentioned earlier, Money Management is one of are the most important aspects of a trading system, along with positive expectancy and self management (trading psychology), which many professionals even believe that these aspects are the “holy grails” of trading.

While Money Management is extremely crucial, it is important to note that having a trading system that gives you a positive expectancy should be in the top priority when you are developing a trading plan. Because if your trading system has a negative expectancy, no matter how well your money management strategy is, you’ll still lose money in the long term.

This is like what Alexander Elder said in his book, Come Into My Trading Room:

A good trading system gives you an edge in the market.
To use a technical term, it provides a positive expectation over a long series of trials.
A good system ensures that winning is more likely than losing over a long series of trades.
If your system can do that, you need money management.
But if you have no positive expectation, no amount of money management will save you from losing.

What is Money Management?
In his book “Trade Your Way to Financial Freedom”, Dr. Van K. Tharp define “Money Management” as the part of your trading system that answer the question of “how much?” throughout the course of a trade.
How much essentially means how big a position you should have at any given time throughout the course of a trade.
Therefore, he refers to Money Management as “Position Sizing”.



The purpose of Position Sizing is to limit the size of what you are prepared to lose / risk in any single trade to a percentage of your total trading capital.

Some people may also call this as “Bet Size”.
Hence, Money Management, Position Sizing, and Bet Size are basically referring to the same thing, which is to answer “how much” in your trading system, as discussed in this post: Trading System: What Is It and Is It Important?

To be continued to: OBJECTIVES of Money Management or Position Sizing.

To view the list of all the series on this topic, please refer to:
Money Management / Position Sizing

Other Learning Resources:
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Money Management / Position Sizing

Money Management is a very important component in trading.
In his book, Come Into My Trading Room, Alexander Elder emphasized the importance of Money Management to be successful in trading:

Every winner needs three essential components of trading: a sound individual psychology, a logical trading system and a good money management.

These essentials are three legs of a stool – remove one and the stool will fall together with the person who sits on it.

Losers try to build a stool with only one leg, or two at the most. They usually focus exclusively on trading systems.

Your trade must be based on clearly defined rules.
You have to analyze your feelings as you trade, to make sure that your decisions are intellectually sound.
You have to structure your money management so that no string of losses can kick you out of the game.

Therefore, here I am trying to summarize and share with you what I learnt about this topic.

The following is the list of articles (to be published) in this Money Management series:
(Click the link below to read each post – The link will be up once the post has been published.)

1) WHAT is Money Management / Position Sizing? (Definition)
2) OBJECTIVES of Money Management / Position Sizing
3) The IMPORTANCE of Money Management / Position Sizing

4) Things to Consider in Setting Money Management Rules:
a) Part 1: Draw Down
b) Part 2: Risk Tolerance
c) Part 3: How Long Your Capital Can Last

5) Avoiding the Risk of Ruin from a Draw Down

6) Example of RULES of Money Management / Position Sizing (By Dr Alexander Elder):
a) Part 1 – Introduction
b) Part 2- The 2% Rule
c) Part 3- How The 2% Rule Works
d) Part 4 - The 6% Rule
e) Part 5 – How The 6% Rule Works
f) Part 6 – Recalculation After Moving Your Stop Prices
g) Part 7 - Recalculation At Every Beginning Of The Month
h) Step By Step Of Money Management Rules: Summary

7) How To Calculate POSITION SIZING:
a) Part 1: Steps Of Calculation
b) Part 2: Example #1
c) Part 3: Example #2

Other Learning Resources:
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2