MONEY MANAGEMENT STRATEGIES FOR FUTURES TRADERS

In a sense, every successful trader employs money management principles
in the course of futures trading, even if only unconsciously. The
goal of this book is to facilitate a more conscious and rigorous adoption
of these principles in everyday trading. This chapter outlines the money
management process in terms of market selection, exposure control,
trade-specific risk assessment, and the allocation of capital across competing
opportunities. In doing so, it gives the reader a broad overview
of the book.
A signal to buy or sell a commodity may be generated by a technical
or chart-based study of historical data. Fundamental analysis, or a study
of demand and supply forces influencing the price of a commodity, could
also be used to generate trading signals. Important as signal generation
is, it is not the focus of this book. The focus of this book is on the
decision-making process that follows a signal.
STEPS IN THE MONEY MANAGEMENT PROCESS
First, the trader must decide whether or not to proceed with the signal.
This is a particularly serious problem when two or more commodities
are vying for limited funds in the account. Next, for every signal that he or she is willing to risk. The goal is to maximize profits while
protecting the bankroll against undue loss and overexposure, to ensure
participation in future major moves. An obvious choice is to risk a fixed
dollar amount every time. More simply, the trader might elect to trade
an equal number of contracts of every commodity traded. However, the
resulting allocation of capital is likely to be suboptimal…. …

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