Chapter 6

Managing Your Money and Positions


Bullet Calculating expected return

Bullet Knowing your probability of ruin

Bullet Mulling over the many methods of money management

Bullet Figuring out what money management has to do with returns

Bullet Deciding what to do with your profits

You can’t trade if you don’t have money. Sure, your brokerage firm will loan you some funds, but only if you have some of your own funds to stake as margin. You have to keep some powder dry.

So how much of your money should you put on the line each time you trade? Risk too much, and you can be put out of business when you lose your capital. Risk too little, and you can be put out of business because you can’t make enough money to cover your costs and time.

Over time, many academic theorists and experienced traders have developed different systems of money management designed to help traders, investors, and even gamblers manage their money in such a way as to maximize return while protecting capital. In this chapter, I ...

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