The Successful Trader's Guide to Money Management

CHAPTER 11Discretionary Trading

11.1 Trading Criteria and Definition

After reading the previous chapter, you'll probably be thinking the money management techniques in it must be combined with a trading system. Certainly, in order to plan things in an effective way, you should simulate the strategy you're thinking of using to see how it behaves, so it's always a good idea to draw up a trading system before you start trading on the market. But it isn't absolutely necessary to have one to apply the rules of money management. The only thing that is necessary to do a good job is to have a clear idea of what you want to do.

Unfortunately, people often start out without knowing what to do to begin working seriously, and start improvising as if this is the normal way to go about things. So, what does having a clear idea mean? And what does it mean if you don't have a clear idea?

First and foremost, let's define discretionary trading as it will be considered in this chapter: discretionary trading is taken to mean trades that aren't made on the basis of signals from a trading system but as a result of observing the market, either on chart or even on the order book. We won't consider scalping as, with this type of trading, which is quite fast and frenetic, the application of money management principles tends to be ‘lost’ in consideration of the potential absorption of the amounts traded on the market. Only a meticulous and honest study of your scalping can rationalise the amounts traded ...