A Handbook of Technical Analysis: The Practitioner's Comprehensive Guide to Technical Analysis

CHAPTER 28

Money Management and Performance Measurement

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

• Understand the significance of money management and its impact on trade performance
• Describe the difference between fixed and dynamic sizing
• Identify and differentiate between the passive and dynamic components of a money-management system
• Understand the effects of asymmetry on a trading system
• Calculate the minimum winning percentage for both linear and non-linear sizing

Money management is critical to success and longer-term survivability in trading. Without the proper application of money management, the application of technical analysis to trading would be an exercise in futility. In this chapter, we shall cover the various issues that plague traders and how they may be addressed via the proper and effective deployment of various sizing and capital-management techniques.

28.1 ELEMENTS OF MONEY MANAGEMENT

Let us begin by asking a few basic trade-related questions:

• Do you try to keep things simple and trade with only one lot or contract?
• Do you usually take profit based a reward to risk setup of 1:1 to 3:1?
• Do you usually place a fixed take profit order to exit?
• Do you usually risk around 2 to 5 percent per trade?
• Do you enjoy trading simultaneously on different timeframes?
• Will you risk more per trade if the system is guaranteed to make money?
• Imagine your trading system has a winning percentage of 34.6 percent and you are currently making money ...