Cash Management In A Trading Account
As a trader, I believe one can have an outstanding system of analysis, order entry, the finest software, and the best research. That being said, in many cases, or perhaps most cases, the retail client ultimately loses a significant portion or all of their trading account.
My father, who was an incredible trader who traded even from his hospital bed while suffering congestive heart failure that took his life on this last trip to the hospital, told me so many times it is burned into the furthest reaches of my brain, take care of your seed corn. What he was saying is to take care of the principle.
Once you close out a position with a profit, that profit now becomes part of your seed corn.
It is my opinion from watching traders for nearly two decades and reading articles over that time from professionals I respect, cash management in an account is the real key to being successful long-term in a trading account.
In as much as you and I do not have access to the Fed like some of the big banks and wirehouses, we do not have an endless supply of cash to inject into our accounts should the need arise.
Rather we are working with a finite amount of money. For most people, their money is apportioned with some dedicated to retirement savings, some to educating children and grand children. A portion may be set aside for travel, a second home, healthcare for themselves or loved ones, or perhaps charities we feel the need to support.
No matter what you have earmarked portions of your portfolio for, many traders will use poor cash management in their accounts and will rationalize taking money from another sector of their portfolio to support sloppy money management.
I donâ€™t mean to make it sound like tight money management will be the silver bullet so many have sought. Rather I would suggest sound cash management is an area of the trading process many spend precious little time examining and employing.
Poor cash management can make otherwise solid research, outstanding software, thorough market analysis significantly less effective, at times to the point of destroying oneâ€™s own account.
The first thing a trader should do, and again all this is my opinion, after all the other â€śgray workâ€ť is done, is script your trades. By that I mean you should get a spiral notebook and write the trade out, entirely, before executing your initial order.
Just yesterday I was looking at a spread trade in an index. It was my opinion the market would be coming down. I put the trade together, it looked good, my risk was limited, the charts told me the market would likely be going down soon and relatively fast, and I have access to two outstanding platforms or I can call my orders in.
Then I decided to print out my analysis from my program. What a shock. The trade has actually no chance of making a profit, ever. The debit spread I had looked at cost me more than I could even make, no matter what.
I was shocked. In my mind the trade looked like it was solid. Low entry price, defined risk, solid chart analysis, thorough market research, all for nothing had I executed the trade.
On my final step of printing the trade and determining my entry and EXIT points, I realized no matter where I exited the trade, I could not make money!
Now I realize no one reading this is going to admit having put a trade like this on in the past, and I would not ask you to. However, if you have been trading for any length of time and have a volume of trades you have made, I would bet you have entered trades only to look at directly afterwards and thought â€śWhy did I do that? I donâ€™t want to be in that trade.â€ť
Or, when you have placed a trade, market conditions changed somewhat but in both cases, you decided to ride it out. In most if not virtually all of these cases, the trade turned into a loser or a breakeven proposition. All the while your money is tied up in a dog of a trade while other opportunities are flying past you.
Letâ€™s be honest, if you have traded enough, it has happened to you as well as to me. The solution, get out of the trade. Had we scripted the trade and studied it before executing it, we probably would have experienced the epiphany I did again yesterday.
Scripting the trades has helped me to understand better the trade I am getting into. I have also been able to sleep better with less stress in my life as I know my exit points, both my exit points. If it is a winning trade, I know where my profit objective is, if it turns against me, I know where I am getting out and how much I may lose should that happen.
I want to know my profit potential and what I am risking. Because we do not have endless amounts of money to work with and the Fed is not going to buy billions of dollars of yours or my bonds, we have to work within a set of parameters somewhat dictated by the size of our account.
With that in mind, I like to work with percentages as guidelines. Nothing hard and fast necessarily but self imposed limits so my mind and the two negative emotions in trading, greed and fear, donâ€™t talk me into a situation I should not be in.
Letâ€™s use an example of a $10,000 initial account value. Generally speaking, once I figure what my potential loss might be, I donâ€™t want to enter a trade where more than 3% of the account value is at risk. In this case, that would be $300 on any single position.
Keeping the 3% rule in mind, at any given time, I donâ€™t want to risk more than 9% on unrelated trades. This means that at any given time, I have no more than $900 at risk.
In the very unlikely event all three trades went against me, my account is not wiped out as I enter real stops either with contingent orders or by executing a trade and manually placing the stop and profit objective the moment I am filled.
If I have to leave my screen for any length of time with orders working, I cancel the orders and get a confirmation number on the cancel. Relying on an electronic platform to execute orders for me when I am not watching has bit me in the fanny more than once. Not recommended. Ultimately, you are responsible for your account and your money. Do not rely on your broker or a trading platform to care as much about your money as you should.
As a trader, you must have a set of written out trading rules to follow. If you do not write these rules down, your mind will talk you into trades you otherwise would have passed on.
Remember, it is better to wish you were in a trade than to wish you were out of a trade.
Another reason why you must have written trading rules for your system, which includes cash management, is over time you will experience what is known as â€śstyle driftâ€ť.Â If you think you are immune to this, you are setting yourself up for disaster from the very beginning. Long-term success will likely elude you.
I can tell you from experience and from watching professional money managers with literally hundreds of millions of dollars under management, style drift is incremental and happens to even the very seasoned traders.
Some like to call it â€śtweakingâ€ť their system. In some cases, this is just an excuse to do what they want rather than what they should.
I happen to know at least one professional money manager who is regularly seen on television who has burned through ÂĽ of a billion dollars or more due to style drift. They are good managers at times but their ego talks them into doing what they would never do normally and the clients generally pick up the pieces when their accounts have been devastated.
Having a written set of rules, including cash management, gives the trader the discipline and the confidence to hang in there even after several losses in a row to make a comeback and ultimately prevail.
No one can pick winners with every trade. Letâ€™s just make sure our losses do not wipe out weeks, months, or even years of doing everything right by trading loosely on a hunch and abandoning what has gotten us where we are to begin with.
As I pointed out in Friday's newsletter, I hope you are registered and have read it, I suggested looking at shorting the E Mini and December Silver. The opening seemed to be delayed tonight and that always gives me the creeps. Silver is a wonderful market to trade yet not as good as the e mini for liquidity. With the strange opening tonight, I felt uneasy to get in and wanted to let you know I am hanging on the sidelines. I was hoping silver would give me the trade I wanted but after watching it a few minutes after quotes started flowing to me, I just didn't like what I saw so no trade for me tonight. As you may already know, the e mini is the mini S&P contract. Watch gold and silver. I was hoping silver would be coming down but at the open and even after the open, but with it lingering up gives me pause. When in doubt, stay out
Earlier today I wrote silver would be coming down along with gold bullion. Since then, the dollar index has gone up significantly and frankly, when I looked at the market after my earlier blog, I thought I might be early on my analysis. As it turns out, I was by just an hour or so. Both silver and gold have decreased significantly. The dollar has gone up for the moment. This will likely be a very short moment for the dollar and the downside for silver and gold is about over in my opinion. Now might be a very good time to reload on the silver. In my newsletter yesterday I mentioned the stock market would likely go all the way down to 1220 basis the September S&p. Boy was I wrong. The stock market has blown right through that mark and is down nearly 7% over the past 5 days. Clearly the stock market does not like the decision or the process the house and senate have been involved with the past few weeks. In my opinion, the markets are much smarter than any of these village idiots in Washington. The man boy and his band of lunatics are so far removed from reality, they will soon be completely destroying the dollar and any credit worthiness America has left. The so called conservatives are either too weak or too stupid to stop the crazies. Possibly both. In any case, now seems like a good time to buy silver, buy gold, get out of the stock market, get out of treasuries, and only when the government stops spending, should any of us reward the banks or the markets with our participation. If this kind of behavior continues in Washington, I foresee a tax revolt to cut off the head of the snake. Going forward, be very careful where you put your money. Stay as liquid as possible. Be ready to go to tangibles should the dollar break the 7200 level. Don't be fooled by today's market activity. I suspect it is artificial and very temporary. Sign up for the newsletter on http://www.FREECharts.com and stay up to date with what is happening in the markets.
Certainly silver and gold have enjoyed some terrific up moves. Especially since our government fixed the debt ceiling crisis. Now it would appear these rallies are stalling a bit which I believe is a sign of a healthy market. We don't want the metals to go parabolic only to crash in a few weeks. We want slower sustained price increases to push the market without margin manipulation by the CFTC and the exchanges at the behest of corrupt banks. The one saving grace, China. With their new exchange in Hong Kong, should the Americans become so corrupt even we can't stand their stench, we soon should be able to trade the Hong Kong market. If the government atttempts to force us back into the US markets by not allowing US accounts to trade the new Chinese markets, I believe the paper market is doomed and the physicals will completely disconnect from the paper market.
Looking at a chart of September Silver, it appears the market may have run out of buyers for the moment stalling a nice rally. Click here to see a chart with a stochastics overlay.You will see the momentum indicator I like indicates the rally may be stalling. I would look for a retracement to perhaps 3785 in the next few days. I suspect this will be another good opportunity to reload. If you are long silver now, I would suggest snugging the stop up nice and close to see what the direction the market may be taking on Tuesday. You may also notice when checking September against further out months, there is a slight inversion in the market which often times straightens itself out. The further out months in a normal market should be higher priced because of carrying charges. Should the market retreat temporarily, I think this would be a good time to buy physical silver bullion as mentioned in the earlier post. Gold bullion in the form of gold eagles, Canadian Maple Leafs, Pandas, Krugerands, or some other non-numismatic coin would be good to buy on a little pullback. I don't think it will be long before we see the rallies in silver and gold resume. The currency problem and the debt problem will not be solved regardless of the debt ceiling bickering even if a solution is found and adopted. A higher ceiling only means more debt and an even more devalued dollar which I believe will send metals higher and the S&P and the stock market in general higher until it causes the stock market to crash as the dollar unravels. It is now just a matter of time so watch closely. A weaker dollar is likely to push all commodities higher along with food in the form of grains, corn most specifically. Crude oil will likely get pushed higher also as the dollar slides into the abyss. Thank you president obama and Fed Chairman Bernanke. The two of you with Timothy Geithner are the three financial stooges. Stay up to date on all that is happening in the markets with FREECharts. Register for our free newsletter to get even more in depth analysis and commentary.
My question for readers tonight would be, how much did you make in the last 6 trading sessions in silver? Did you make $30k, $25k, $20k, $10k, how about $5k? If you did not catch a bit part of this move, you probably missed the last weeks newsletters. If you are not receiving the FREECharts.com newsletters, you should go sign up right now. The sign up is on every page of FREECharts.com. My forecast last week said silver would be coming down to 3450. The market came down to 3480. I suggested buying silver down here with a 3450 September put option as a safety net and indicated silver would be around 4050 very soon. It went over 4050 and is currently at 4061. If you are trading the paper markets, each point in silver is $50. The market has gone up nearly 600 points. You do the math and you will discover what this market is capable of. If you are trading the physical markets, then I hope you were buyers early on in this rally. If you did not take advantage of this opportunity, don't be discouraged as I believe silver will be well over $50 per ounce by the fall and possibly much sooner. If you are buying physical silver, buy silver bullion in the form of silver eagles or "junk silver" bags. These bags are sold in terms of face value of the coins inside. For instance, a $1,000 bag has 10,000 dimes that were minted 1964 or earlier. Dimes, quarters, and half dollars from 1964 and earlier are 90% silver and referred to as junk silver. They will have approximately 715 ounces of silver so depending on what the price of spot silver is, you can get a pretty good idea of what the value of a bag of junk silver would be. In my newsletter I show you how to analyze any stock, mutual fund, commodity or futures contract, or Forex currency pair as well as indices like the S&P. Technical analysis is not an exact science but I believe this analysis can put you on the right track. We also talk about money management inside your accounts so you know what to risk and why. I get very specific. If you have an asset you want analyzed in the newsletter, which comes out each Tuesday and Friday, send me an email to RBiggs@FREECharts.com and I will try my best to include it. I will also offer suggestions on how it could be traded. Sign up now while it is still free to new subscribers.
As you may already know by now this morning, silver almost hit our objective of 4050 in the September contract hitting 4047.5. I believed silver was heading here and once it breaks 4050 and holds it, will have a real chance to begin moving higher at an accelerated rate. At least this is how the market looks at this moment. Clearly the markets are dynamic so they can and will change my opinion later in the day. I would prefer to see a more modest consistent daily move of 50 to 80 points. Moves over 100 points gives the manipulators all the reasons they need to expand margin and push modest accounts right out of potentially profitable trades. We also see gold has made a new all time high breaking through 1600. This puts the silver/gold ratio at about 40. I suspect at some point we will see this ratio back to about 16 which would make silver $100 an ounce or gold would have to come down to $640. Since it does not appear gold will accommodate and the dollar seems to be getting weaker by the quantitative easing, my thoughts today are the white metal goes up. With the dollar up slightly today we can see the S&P taking a bit of a hit as the stock market or the stocks in the stock market are requiring fewer dollars to buy a stock. The temporary strength in the dollar I believe is just that, temporary. If you have considered buying metals, now would be a good time. The paper markets may provide some opportunities to make paper dollars, the real possibility these paper dollars will be worth much less than they currently are is very real. Buy the real thing and have it shipped to you or go pick it up. Don't tell a single person you have it. The paper markets could be worthless paper in the future so don't put too much confidence in any of them. The folks in New York and Washington DC don't want you or me to win. They want to win. If you are fortunate enough to win, the folks in DC will tax you and give it to their buddies on Wall Street. The game might be rigged a little. Buying real silver and gold takes them out of the equation. There will be an underground economy that will bypass them all. You and I already eat 100% of our losses so why not enjoy 100% of the gains? Remember, when buying metals, avoid numismatics and buy gold bullion or silver bullion coins. The premium is much less for these and you get more metal for your soon to be devalued paper dollars.
This Sunday night we are seeing silver, gold, and the dollar move up. I am still expecting silver to hit 4050 before long and gold wants to break 1600. Gold hit 1599.5 tonight but there is a psychological barrier to a big number like 1600. With Bernanke revealing this past week a third round of quantitative easing is in the works we should see inflation accelerate. This is certainly bullish for precious metals, crude oil and the grains, especially corn. My suggestion is to buy physical silver and gold at your earliest convenience as this "easing" is a load of bull. This new round of easing is going to doom the dollar. The only support for the dollar is coming from the complete crazy socialized practices of Europe. Seeing how it has destroyed Europe doesn't seem to impress Bernanke or obama, the man boy president. They are going to create money out of thin air until we are to be remembered in the history books as a once great country with a once great currency gone the way of all previous fiat currencies. Buying silver and gold is your hedge against these village idiots. Once again, I suggest doing it now as I suspect a few short months from now you will wish you had. Having gold or silver in paper such as futures through your commodities broker or ETF will be paid in devalued dollars if paid at all. When looking at silver and gold, buy silver bullion or gold bullion. Numismatics are not what I would recommend as you would pay an excessive premium. You can continue to get quotes and charts not only on the stock market and mutual funds but also on Forex and ETF's right here at FREECharts.
If you are not already registered for our newsletter, do so now by clicking on the following link http://www.freecharts.com/sign-up.html You will receive our newsletter twice per week. They are relatively short and cover topics like the stock market, the US Dollar, Commodities and Futures such as silver, gold, crude oil, the grains such as corn and wheat, as well as the financials such as treasury issued bonds and notes. We also cover options basics as well as more advanced options strategies. Buying options, selling options, spreads and complex strategies. In addition to all of this, I write often about money management as I believe you can have the best entry system in the world but if you have poor money management or undisciplined money management, your money will be leaving your account and migrating to someone else's who may not have a system close to as good as yours but exercises better money management. Trading stocks, commodities, or forex is an endeavor you can be successful at. Although trading does take time to learn, it does not or should not take years. I will help you develop a system using 3 indicators and good money management and I believe you will be more than pleased with the results. I would suggest paper trading it for a while until you understand it completely and have developed a money management discipline you can stick with. If you do not have this discipline, you will be just another one of the hundreds of thousands of people who have entered the markets and left frustrated and with much lighter pockets. The newsletter costs you nothing at the moment and if you can pick up 1 pearl of wisdom from my experience of watching traders make and lose money over many years, then it is worth it. You work hard for your money and it has taken plenty of time to accumulate it. Why not give yourself every opportunity to make it grow? Sign up now at http://www.freecharts.com/sign-up.html