NEW TECHNIQUES
Could This Technique Be The One?
Money Management Matrix
by Peter Nilsson
Whether you're a systems trader or a discretionary trader, here's a systematic money management technique you can apply.Being a discretionary trader in stocks as opposed to a systems trader often is viewed as not being systematic. Although discretionary trading allows the trader greater freedom to use his or her intuition and experience, the core approach or plan can and should be systematic. Much like a business statement, the trading plan should deal with all aspects of trading from practical issues to trade management. The concept of "plan the trade-trade the plan" has many depths and focuses on the business aspect of trading. This has the added bonus of detaching emotions during trading. As a result, the decision to trade becomes a business decision rather than a personal "Am I right or wrong?" decision.
HOW DO YOU MAKE IT SYSTEMATIC?
One way to incorporate a systematic approach toward money management and position sizing, while still leaving room for experience and staying discretionary, is to use a money management matrix like the one I propose here. The matrix should be used as a tool to point you toward a specific direction; it does not dictate the final strategy that you should choose. You need to consider many different aspects, such as how current volatility affects money management parameters, diversification, overall exposure/risk, and so forth.
Often, the entry of a trade is given attention while not much emphasis is placed on the more important questions of money management, position sizing, and how to exit with a profit. To give a quick answer to the question of what to focus on for a particular trade, a money management matrix can be helpful. The matrix tells the trader where among different money management strategies to look and also deals with the issue of position sizing.
...Continued in the December issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the December 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2006, Technical Analysis, Inc.
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