Money Management in Day Trading

Posted by Deb | Futures Trading Tips | Thursday 12 August 2010 9:54 pm

I read yesterday a great article by Ilan Levy-Mayer, VP of Canon Trading, the company through which I do my  trading.  In this article he gives some rules to managing your risk when day trading.  He sees the managing of the risk as the most important factor in determining whether a trader will be successful or fall.  Any trader will have bad days, in which he loses.  Only a good risk management will help him not to lose all his money, and to be mentally capable of continuing the trading successful.  As I said here before, a trader’s mentality and psychology is the most important part of trading, more than any market indicator.

His rules are similar to the rules I wrote down here in my trading rules and tips pages, though he added a few interesting ideas.  I will give here an outline of his system:

  1. Daily stop loss:  Every trader must set for herself a daily loss limit.  Your limit depends on the capital you have and your personality:  How big a loss are you able to deal with.  When the loss exceeds your daily stop loss, close your positions and stop trading for the day.
  2. Daily maximum number of trades:  Going on with more and more positions will set you for losing.  It will make your fees too high for any substantial profit.
  3. Set your breakeven level:  This is an interesting idea I haven’t heard about before.  You should set yourself a certain profit limit, which if you get to during a day trading, and then lose again your profit, you should stop trading for that day.  The psychology of this, as I understand it, is that there is usually a certain limit that if you pass and than start losing you feel as if you have to fight to get it back, and that sets you to lose.
  4. In a similar way, set your profit target:  This will be a limit greater than your breakeven level.  For this target you will set a trailing tail.  The logic of this pair is similar to that of the breakeven level:  If you get to the profit target or pass it and then start to lose, don’t let yourself lose more than the trailing level.  If your profit goes down from your maximum profit of that day by a sum equal to the trailing tail, it is time to stop for the day.  The logic here is similar to that of the breakeven level:  When you make a nice profit and than lose it, after some critical point you can’t take it and lose your logic.
  5. Profit limit:  similar to your daily loss limit, set yourself your profit limit.  Don’t let your profits make you too greedy.  Enough is enough, and if you try to make more and more positions you will start losing.  Your trading fees will accumulate, making your profit smaller.
  6. Stick to your rules!  This, from my experience, is the most difficult rule of all.  But if you do manage to follow these rules, with the limits you set for yourself, you will create for yourself  a positive trading psychology, and make your chances to survive and make profit much higher.


Good luck in your trading!

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