What are my rules for money management?

This blog entry will be updated with time. Money management is always a “learning” process. It can change with time based on what is seen in the charts. Here are my rules for money management.
1. Enter Stops for every trade.
Depending on the Ichimoku Strategy, the Stop will be different. The buffer that is added to the Stop depends on the intruments and also history. What do I mean my history? For each instrument, the past needs to be studied in order to determine the correct buffer that needs to be added to the stop. Here are my rough guidelines for various instruments.

  • Forex: 6 PIP. (Most people use 5 so we are offsetting by 1)
  • Futures: 5 ticks (Most people use 4 ticks so we are offsetting by 1)
  • Equities/Stocks:
    • $10-$50: 12 cents
    • $50-$120: 26 cents
    • > $120: 51 cents

2. Money Allocation:
My rule of thumb is only allocated 20% of my cash at one time. Most people are on a quarter system. If you offset by 1 what most people do, it would led you to 5 quarters. Therefore, 100%/5=20%. This will give us a better chance of “defeating” a lot of bizarre events throughout the whole year that could cause a lot of loss.
When entering a trade, I do not look at the risk/reward ratio. The analysis of the chart tells me the Stop and Entry value. Based on the Stop value in respect to the Entry value, the number of contracts are determine. This is based on the 20% money allocation. At the beginning of a long term trade, I start with a small number of contracts. Once those contracts become “free”, I increase position allocation. Position allocation depends on a pull back, 20% cash allocation, and chart indicators.
3. Margin:
My rule of thumb is DO NOT use margin. Margin is deadly. We are not trying to get rich over night. We want to trade for a residential monthly income. With 20% cash allocated at one time, there is no need for the use of margin.
4. Profit targets:
Profit targets vary based on Ichimoku strategies.
5. Profits:
It is easy to generate a profit but it is very hard to keep it. Therefore, once a trade is profitable, preserve profits.
For EDUCATIONAL USE.    Commodity Futures Trading Commission, Forex, Futures, Equity and options trading has large potential rewards, but also large potential risk and may not be suitable for everyone. You must be aware of the risks and be willing to accept them in order to invest in these markets. Do not trade with money you can not afford to lose. This is neither a solicitation nor an offer to Buy/Sell. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this document. The past performance of any trading system or methodology is not necessarily indicative of future results. All information provide d on the Blog is for educational purpose .

About the Author Manesh Patel