The Successful Trader's Guide to Money Management

Discover how to maximize the effectiveness of your trading techniques by applying the right money management techniques

Money management is a central element of trading the financial markets, especially in uncertain times. Yet investors often misinterpret the central concepts of money management. To manage risk and obtain optimal rewards from your trades, you will benefit from a deeper understanding of how the professionals manage money. The Successful Trader’s Guide to Money Management describes the operating methods that seasoned investors use. With this book, you’ll avoid the common mistake of focusing too much on entry levels and stop-losses, and you’ll learn to consider the impact of proper money management on your final portfolio results.

Successful traders focus on risk management, avoiding opening positions that are too large with respect to the total capital they have available. Packed with practical examples and with special focus on money management or position-sizing, The Successful Trader's Guide to Money Management offers a comprehensive coverage of widely practiced risk management models, examining their strengths and weaknesses. You will learn how to use the most effective operating models, including the Fixed Fractional, Fixed Ratio, and Percent Volatility models. This book also provides a thorough analysis of portfolio management models. These essential tips will nudge you toward a more winning position as you enter your next trades.

• Learn how the professionals manage money and avoid common trading mistakes
• Design a trading system that minimizes risk and maximizes reward through correct position sizing
• Understand the most important money and portfolio management models, including Fixed Ratio, Percent Volatility, Fixed Fractional, and more
• Equip yourself to trade smarter, individually or with a broker, on equity, derivatives and Forex markets

For individual and institutional investors alike, this book is a ticket to more solid trading strategy, especially in uncertain times.

Foreword xi

Preface xiii

Chapter 1 Martingale and Anti-Martingale 1

1.1 The Right Stake 1

1.2 Martingale 2

1.3 Anti-Martingale 9

1.4 More Examples 15

1.5 A Miraculous Technique? 17

1.6 Conclusions 20

Chapter 2 The Kelly Formula 21

2.1 Kelly and Co. 21

2.2 Conclusions 31

Chapter 3 A Banal Trading System 33

3.1 Analyzing a System Based on Moving Averages 33

3.2 Applying the Kelly Formula 37

3.3 Conclusions 52

Chapter 4 Money Management Models 53

4.1 The Fixed Fractional Method 54

4.2 Optimal f 60

4.3 Secure f 65

4.4 Fixed Ratio 68

4.5 Percent Volatility Model 81

4.6 Levels for Changing the Number of Contracts 91

4.7 Conclusions 92

Chapter 5 Refining the Techniques 94

5.1 The Importance of the Trader’s Temperament 94

5.2 Reduced f 95

5.3 Aggressive Ratio 97

5.4 Asymmetric Ratio 99

5.5 Timid Bold Equity 100

5.6 Equity Curve Trading 103

5.7 z-Score 110

5.8 Conclusions 112

Chapter 6 The Monte Carlo Simulation 114

6.1 Using the Monte Carlo Simulation 114

6.2 Maximum Loss 135

6.3 Conclusions 139

Chapter 7 The Work Plan 141

7.1 Using a Work Plan 141

7.2 Conclusions 155

Chapter 8 Combining Forces 157

8.1 Using a Combination of Systems 157

8.2 Portfolio Money Management 168

8.3 Which Capital? 169

8.4 The Effects of Portfolio Money Management 173

8.5 Conclusions 180

Chapter 9 Money Management When Trading Stocks 181

9.1 Trading in the Stock Market 181

9.2 Conclusions 192

Chapter 10 Portfolio Management 193

10.1 A Portfolio Approach 195

10.2 Some Improvements to the System 208

10.3 Conclusions 214

Chapter 11 Discretionary Trading 215

11.1 Trading Criteria and Definition 215

11.2 An Example: Mediaset 218

11.3 Adjusting Volatility During the Trade 225

11.4 Trading Futures 228

11.5 Conclusions 245

Chapter 12 Questions and Answers 246

Appendix I 252

I.1 The Impact of a Trading System on Planning 252

I.2 The Trading System 252

Appendix II 268

II.1 Understanding the Type of Strategy 268

Appendix III 278

III.1 The Advantages of Forex 278

Appendix IV Online Trading 282

IV.1 The Trader 282

IV.2 Trading Profits 284

IV.3 Systematic or Discretionary? 286

IV.4 Choosing the Broker 287

IV.5 Which Platform? 288

Index 291

ANDREA UNGER is a full-time trader, educator, author and Founder and CEO of Unger Academy^®. He is a highly sought-after speaker at conferences in Europe, the US, and APAC; a member of Mensa International; and an honorary member of the Italian Society of Technical Analysis.

Regardless of the market or country in which you operate, money management is a fundamental aspect of risk management in investing and trading. However, while many operators focus on identifying operational set-ups, like entry levels and stop-loss ratios, many do not consider the often-decisive impact that money management can have on their investment returns.

In The Successful Trader’s Guide to Money Management, celebrated investor, educator, and author Andrea Unger delivers a thorough exploration of the different methods used by traders and professional investors to calculate how much of their capital to use in individual transactions. Sometimes referred to as “position-sizing,” money management in trading is a central component of effective risk management.

You’ll find practical examples with a special focus on money management and position-sizing, as well as comprehensive coverage of widely practiced investment techniques, including discussions of their strengths and weaknesses. You’ll discover treatments of the most effective position sizing models. You’ll also learn about portfolio management, with examples on how different approaches lead to completely different results.

Finally, the book also offers essential tips on building and designing a trading system, how to trade on equity, derivative, and forex markets, and how to choose a broker aligned with your needs.

Perfect for investors, retail traders, fund managers, and professional or advanced investors, The Successful Trader’s Guide to Money Management will also earn a place in the libraries of anyone thinking about beginning to invest or start their trading career and who seeks a one-stop, authoritative resource on how to manage one’s money while actively trading.