The KISS Principle of Money Management – Week 65
In this week’s 4-Minute Drill, let’s dig into the topic of money management… even deeper than we have in the past…
Read the full video script below. Let us know how you handle your money management… and leave a comment below!
In this week’s 4-Minute Drill, let’s dig into the topic of money management… even deeper than we have in the past. Why is money management and your profit and loss strategies so important?Well, if you move forward with a money management plan you can be confident in… meaning one that controls your risk consistently and effectively… then you’ll be a trader who will go forward with CONFIDENCE and DISCIPLINE……knowing that no matter what, you’re not going to be taking any big hits to your account.OK… with that in mind… let’s start with the KISS strategy.KISS … K-I-S-S.. as you probably know, means ‘keep it simple stupid)…. so here we go…and please note that I’m talking here in GENERAL TERMS.
If the market is trending up, buy it. If the market is trending down, sell it.
If the market moves against you after you’ve opened your position, close out.
If the market continues to move in your favor, hold your position until you are happy with the amount of profit and close out your position.
In this fashion, you have only one decision to enter and that is to buy or sell.
WHERE TO EXIT is your money management strategy.
When exiting a trade you also have a number of choices
If you have a profit, you may nurse it along, hoping that it’ll reach your target. But even then, you might have the tendency to get greedy and linger a little too long hoping for a bigger move.
But if we move stops to protect profits or at least break-even (including transaction fees) we can take a chance.
Losses are another matter.
Traders hate losses and put full focus on getting out quickly-at the stopping price or before
If things don’t feel right, punch out.
It’s a game of probability and every loss just gets you closer to a winning trade.
Get out and move on.
The philosophy of ALWAYS BEING DECISIVE WHEN EXITING A LOSING TRADE is essential if you want to stay in the hunt.
A good way to think about it is … that when you enter a trade the market should move in your favor almost immediately.
If the trade doesn’t move your way almost immediately after you enter it, you are probably wrong and should get out.
This, of course, applies for long OR short positions.
You may miss a few wins, but it’s the losses that hurt and NOT missed opportunity.
For options traders, there are strategies that capitalize on sideways movement, so in those cases, no movement is the optimal… and movement in any direction is cause for concern.
My point here in the first part of this General Money management discussion is you can have an effective risk-control strategy that is spelled out in very simple terms.
.. and it all leads to one place…
KEEPING YOUR LOSSES SMALL is your first priority.
Do that, my fellow traders, and you’ll take a quantum leap toward your long term trading success.
In our next 4 minute drill, I’ll be hitting on a controversial Money Management approach… SCALING IN.
We’ll take a close look at that.
So until next week…
STAY DISCIPLINED
Category: 4-Minute Drill for Traders, Trading Discipline, Trading Discipline (mental/emotional issues)
Again several key points… I do not known if I could do it myself , but I will do my very best!
Great advice I wipe out several accounts (live)hoping it will turn in my favour instead of getting the hell out. Now I know better lesson money I guess
Norman, thanks for the tips. It helps me to reinforce my beliefs. How did money management work really depend on the individual and what kind of approach he wants to take. Could he bare more risk but in return for greater loss/profit? Or his capability of earning, age, etc. For me as I grew older I became more insecure about my wealth, so I would just switch a portion of my wealth to some investments with less risk.
Very logical helps me greatly thank you.
Thanks for all the great comments on this Money Management post!
Norman, u asked in an early 4 minute drill if there was anybody out there listening – well I wanted to let you know I am. I am from australia and your messages strike accord with me every week. I seek to build the messages into to my daily visualization and rehersal routines and that helps me greatly. Please keep it up.
Paul – don't worry about what you DID'nt get. Just worry about and be happy with what you did get.
Great learning from you Norman. I follow you very close.
Norman,
First off, you are doing a very good job by posting these articles…they are indeed helpful.
However, in this video I do not believe: “If the trade doesn’t move your way almost immediately after you enter it, you are probably wrong and should get out”. Retracements do occur very often in market.
Rather, you should have mentioned – “If the trade moves beyond the level which makes you prove wrong then get out immediately. Until then, stick to the trade until your SL or TP is hit”.
In fact, from my vast experience I can challenge any trader / coach that “Cut your loser and let your winner run” is totally inapplicable to forex market since the currency do not trend in a sustainable way. There is no country who will benefit with a very very strong or weak currency unlike stocks where everyone (Shareholder, Company, Stock Exchange and Economy) benefits from BULL MARKET.
The best way to make money (in FOREX) is to stick to your SL and TP with positive expectancy on each trade and not managing trades since emotions get into the way and make us damage the trade instead of managing.
I would love to hear from you on how to be disciplined enough to stick to SL and TP without bothering about the outcome of the trade.
I hear you on the ‘absolute’ statement I seem to have made, chintz, about getting out if a trade doesn’t work early. I meant it as a THE MOST general statement you can make to start to create a more detailed trading plan. One would need to quantify what ‘immediately’ means in my statement. For me, it means if I’m trading a 10 second bar chart, if it does not move after the next bar is complete, I’m out. It’s part of my trading plan and it works for me and my personal ‘credo’, “I’d rather be out of a trade wishing I was in, than in a trade, wishing I was out.” There are other rules, of course, but I explain this simple “timing rule” because it defines this statement for ME and helps me to reduce my risk to small risks as well as fits my ‘trading personality’.
As far as sticking with stop losses and take-profit points, these are just two tools in your toolbox when it comes to building your trading plan. Construct something that makes sense to you and fits YOUR personality using these tools. Do you find yourself losing focus after waiting for a trade to mature? Construct a plan with a timing mechanism where you’re “out” after 10 minutes of non-movement (whatever). But whatever you decide on when you are building your rules..TEST IT.. first with no money on the line, then with the minimum number of positions to run your plan.
One thought for you. I seldom initiate a trade with just one contract. So, usually 2-10 contracts. I have seen, from testing and then experience, that my trade initiation process leads me to having a usual instant small move in my favor. I use this knowledge to exit 20 or 30% of my positions at that first move. This gives me some ‘cushion’ as I manage the rest of the trade.
And as far as staying disciplined… well, that’s only a matter of training your subconscious mind… easy.. and that’s what our Mastery Kit does (plus a lot more)
I hope that was helpful.
How do you decide where to set your profit target? Too low and you leave money on the table..too high and you don't get filled…any advice?
Hi Paul…
Where to set your profit target is really up to the method/style of trading that you’re using. Once you make your decision, you need to test the rule(s) without money at risk and then with a minimum amount of money is at risk, if the no-risk checks out well. I know of successful traders who exit EVERY TRADE they do via a trailing stop and let all moves ‘run their course’ without a topside. This is NOT my style, but I respect anybody’s system that has been tested and works for them.
Let's hear from you! How is YOUR money management?