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| Whole Account Management |
| This is an area that I have been working on developing for a while. I'm sure I'm not the first one to think of it but I haven't read of anyone else using this method either. The idea is to apply money management to you account as a whole. In effect you are taking money management on step further and applying the principals to your account as a whole. Don't get me wrong, you must have proper money management at the trade level before you can move forward and apply it to you account, but this will help create more controls for your account to operate within. This in turn provides greater stability emotionally and mentally allowing you to further develop as a trader. The Theory: The idea behind it is simple, treat you account in a similar fashion as you would a specific trade, so it would include things like
What this does is gets you out of market's that are not in sync with your trading strategy before you take a large capital or emotional loss. Just like money management for each specific trade, whole money management is very much a personal choice based on comfort levels and preferences. There is no such thing as a correct system, just like entering the market, it is all about what you are comfortable with and what you have the ability to execute. For Example: Let's say that you are a day trader, and you have a setup that can produce 5-8 trades per day. So on the days when the market is in sync with your trading system most of your trades are winners and you do just fine. But the good days are not what we need to be concerned with. What about the bad days? Those are the days that drain not only your account, but your emotional reserve as well. Those are the days we need to keep in check. So let's setup a few whole account money management rules to prevent these soul sucking days from happening. Rules:
This example is for a day trader, but will work regardless of what time frame you trade, if you are a position trader you would just increase the time from from day to week, or possibly month. You probably noticed that almost every rule has to do with STOPPING TRADING. The first objection to this method is that people always think the next winner is just around the corner, and that it won't be a loss, after thier next trade they will be ahead!! While I do appreciate the optimistic attitude, that is seldom the case, when a trader is down, they often start trading from a fear mindset, a need to win it back mindset, and that is not going to allow you to increase your account. No matter how much you want it. The Hedge Also another topic having to do with Whole Account Management is the hedge. Most traders understand what an investment hedge is but let's do the same thing with our whole account. What if the only two options for your account were to stay the same or to increase each month, there was no chance of it decreasing. Well , you would say, "sign me up." This hedge is not something you can buy, rather how you manage your account and look at it as a whole. The hedge is basically doing something that would put an certain amount of money in your trading account each month, changing something in your lifestyle is usually the easiest approach to creating a hedge. The idea is if you limit your monthly loss to the amount of your hedge, you account will only go one way, up. Now of course there is no free lunch here, something will have to be sacrificed for this to happen, but let's take a look at what type of effect this will have on your account. Let's say you could cut some extras out of your monthly routine and make a $500 deposit to your trading account each month. Assuming you have setup proper money management in all other areas this will allow your account to grow much faster, it will also train you to only take the choicest of trades as you don't want to be sitting it out for most of the month. The net effect is that your account can only grow, "sure" you say, "but I've got to deposit some of my own money each month to do that, that's the same as losing it." Well sorta, the difference is you have modified your life in a SMALL way that will allow you to use the power of compounding. How? because as your account size grows you will be able to take larger risks and still maintain the 2% rule. Because you are using good risk to reward ratio's your winning month's will be quite large, while the losers will be very acceptable. This is the whole basis of Whole Account Management, you need to focus on trading success from every angle. It is what is necessary to become successful as a trader, it is things like the topics covered in this site that will give you the edge over the next guy. To Fully Understand this Key Concept read The New Money Management |
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