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Technical Analysis

The Importance of Sound Money Management

Many traders when first starting out only focuse on the selection/prediction aspect of trading.

Most traders spend their time analyzing the commodity markets to predict where it is going instead of developing low risk ideas in which the potential loss is small. Spend time developing low risk ideas, instead of trying to study every aspect of the commodity markets. Nevertheless, a system of some sort is important, it is by far the least important aspect of being a profitable trader.

Profitability is solely dependent on money management and discipline. Center yourself calmly through exercise, diet, meditation and generally leading a balanced lifestyle. Let go of your attachments to the outcome of the trade and look at the trade as an objective event.

Concentrate on sticking to your entry and exit rules for each system and the profits will take care of themselves. Your management of the emotions of greed and fear are vital. Markets move due to fear, greed and ignorance as much as any other reason. You have to realize that as a commodity trader, during rough times, as much as 70% of your trades will be losers. Profit will generally come from a relatively small number of commodity trades.

True winners make a point not to let their ego, emotions, tips or gossip get in the way of what their system tells them to do. Don't dwell on large profits of open or closed trades.

To beat the market go about your business in a disciplined way. DO NOT start to think that "I am smart and can easily make a million." It will cause you to forget to use the wise, patient and conservative RULES you need to follow to make a profit.

Your loss of confidence is the greatest loss you can suffer, so don't overtrade or step in front of a freight trains. Stalk the market as deadly game or else you will become its prey.

Make time to study and organize a trading plan for each and every trading day. The commodity markets you hold a position in are the ones to concentrate on.

Professional traders know that money management is extremely important, but unlike hobbyist, they focus on the markets. Don't get greedy and count dollars, ignoring what the market is telling you. To make it you have to level your emotional peaks and valleys. That requires dedication.

Patience is the key word. My experience is that the fewer the number of trades, the more profitable the method. It goes without saying that you must not second guess your system. Take every trade according to the rules.

Now comes the important part - how to handle the inevitable drawdowns. Back testing has told you what kind of a maximum drawdown you can expect. If you can't emotionally or financially handle at least this much drawdown, don't trade the system in the first place. And don't be greedy and overtrade, buying or selling too many contracts (you should have rules for the precise amount of contracts to trade) in an effort to make a lot of money in a hurry. Under capitalization is one reason so many are losers.

Once you have a system that works, don't change it. If you have other ideas, develop another system! If your goals are not met or if you feel tired or stressed -- STOP and reevaluate the situation. Either close out all positions or let those in profit run their course without adding to them

And don't forget the importance of exercise, of the mind and body. The importance of friendship and making time for these friends. The importance of balance, taking time out to watch the flowers grow, not just working/trading. That only achieves a goal in a very narrow focus and achieves nothing but leads to unproductively and unhappiness. Remember to be good to yourself; don't be too hard on yourself. Areas you can improve on simply provide you with valuable feedback.

Anything you do gives you experience. As a result, you can look at your decisions and resolve to change them in the future, using them as a learning experience, rather than accepting the failure judgmentally, by thinking 'I have failed.' When victories occur, I pat myself on the back, often. I dwell on them as they are the building blocks of my future accomplishments.