The Successful Trader's Guide to Money Management

CHAPTER 5Refining the Techniques

5.1 The Importance of the Trader's Temperament

Once you've familiarised yourself with the techniques described in the previous chapter, with due consideration you can go beyond the basics and study the variations that are best suited to your character.

As we've seen, there are different schools of thought on the exposure to risk, depending on the capital you've accumulated. Ryan Jones with his fixed ratio method prefers a more noticeable risk at first, then a subsequent reduction when you've accumulated significant capital. Everything is relative; a trader who starts with €10,000 could tolerate a €500 loss, which would be 5% of his capital, but he'll probably consider a €5,000 loss hair‐raising. If the same trader used the fixed fractional method, and everything went as planned, at a certain point he might have increased his capital to €100,000. At that point risking the same 5% would mean risking the same €5,000, but now it would probably worry him less. What we're doing is analyzing things from the point of view of the person's temperament. If the trader had made that €100,000 over a period of five years, he'd have gradually got used to larger and larger cash flows, and would be naturally ready to face a potential loss of €5,000. If the increment was unexpected, however, and the lucky trader found himself with €100,000 in just six months, I sincerely doubt that, no matter how euphoric he was, he'd be psychologically prepared for the ‘new’ ...