Saturday, January 18, 2014

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

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