MONEY MANAGEMENT
Often, Less Is More
The Profit's In The Details
by Bryan Babcock
Minimize the effects of greed with the trader profit equilibrium equation.
For many traders, success always remains just around the corner, just a step away. All too often traders allow one bad trade to ruin their day. Or perhaps one bad day ruins the week or even the month. These are symptoms of a trading strategy that, while it may appear to have what it takes for a successful strategy, is doomed to fail.
Most traders focus their energy on the trade setup or entry, concentrating too little on actual trade management or the exit. They want to hit a home run on every trade, even when that means giving up base hits that would win the game. Rather than address this problem by always entering a trade with a preplanned exit strategy, these traders neglect to develop their methods, or postpone the task indefinitely.
Many new traders fail because of greed -- that powerful emotion that
leads to errors in discipline, money management, trade selection, risk
management, and profit management. I will present a statistical model for
success called the trader profit equilibrium equation, which minimizes
the effects of greed on the decision-making process. The model is based
on profit management and can be applied to most trade selection systems.
It is designed to help you manage your position after entry.
Figure 1: DESIRED ANNUAL PROFIT. Here's a look at how much of a point move to expect based on the number of trades and your desired profit level.
...Continued in the January 2003 issue of Technical Analysis
of STOCKS & COMMODITIES
Excerpted from an article originally published in the January 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.