figure 7.14 a fast market. in just one minute, price has moved down the equivalent of $350.

S8P500 DEC 08/15/95

fast iiarket

.................................................................................................... 560.7

............ ............-.......... .............................................................. 560.6

.......................i...........-L...........].................................................. 560.5

.................................................................................................... 560.4

.................................................................................................... 560.3

.......................................................................................-j........... 560.2

...............................................................r...........-I-...................... 560.1

...............................................................•........................1.......... 560.0

...............................................................J..................................... 559.9

............r......................L................................................. 559. g

95 : 35 : 36 : 37 : 38 : 39 : 40 : 41 :42 : 43 : 44

The only way to avoid this is to try to stay away from the markets that are more prone to limit moves. Also, stay away from markets that are illiquid no matter how good your results are with a system in that market. Because limit moves can be a part of trading, make sure that you are adequately capitalized so if the market does move limit for several days you can withstand the losses.

Figure 7.14 is an intraday chart of the S&P 500 on August 15, 1995. The bars represent 1-minute intervals. There is a period of 4 minutes when the market was in a fast condition. If a trader tried to go short on the fourth bar, he conceivably could have received a fill anywhere from 560.55 down to 559.80, almost .75 ticks wide during a period of just 1 minute! This is a potential slippage range of $350.

Conclusion

The term money management can cover a vast array of topics and techniques from something as simple as knowing how many contracts to trade to the complexity of equity analysis. Traders should never embark on a trading venture until they understand the concepts of money management. Lack of this skill is what retires so many people

from the game of trading. Statistics say that the chances of small traders reaching long-term success in the markets are around 3 percent to 5 percent. Sorry to disappoint you, but that number is probably accurate.

How can you overcome such overwhelming odds? Following these five steps will

help:

1. Develop a trading system designed to fit your personality, needs, equity, and temperament.

2. Develop a sound trading plan.

3. Develop and study money management principles and apply them to your overall system and analysis routine.

4. Have the discipline to follow your rules to the letter and have the knowledge to change the system if your money management signals you to do so.

5. You will need a little luck.

Start with the basics of what money management is and progress to the complex analysis. Everyone should plot his or her results and equity. That is the only way to graphically see how you are doing. Pity the trader who starts trading with $10,000 and 6 months later is down to $2,000. "When asked, "What happened? Didnt you see it coming?" The trader looks off into space and says, "No."

Analyze your trading with the same vigor and scrutiny that you would use in developing a system and analyzing a market. There are always plenty of good low-risk opportunities in the market. Find them and then apply your money management.

Part I

Psychology

• Trading is a game of odds. Having a strong disciplined mind-set, statistically proven strategies, and strict money management are crucial in stacking the odds in your favor. Trading is also serious business as you can lose serious money. Expect to reorganize your life to integrate successfully all aspects of these required skills.

• Mechanized system trading (MST) is well designed to help you overcome fear. For novice investors, MST avoids the pitfalls of discretionary trading with its anticipatory forecasts that are often misleading due to optimism and over-confidence.

• Trading with a system requires tremendous concentration, diligence, and self-discipline because its trading style may not be within your comfort zone. Stress levels can lead to utter destruction of your psyche and physical self, if not properly managed. Make sure the system you design is compatible with the way you want to and are able to trade.

Markets and Time Frames

• Always look for liquid markets because they give you the ability to get out if you so choose.

• End-of-day (EOD) trading is easier than intraday (ID) trading. With EOD, you can perform calculations and plan trading strategy at your leisure anytime before market begins the next day. This permits you to hold a day job earning income. Your trading expenses are relatively low. Your clearinghouse and broker do not need to operate with split-second timing so transaction costs are small. Also, daily data is inexpensively available from many sources. You dont need a thorough understanding of entry and exit techniques and trading floor operations. Finally, stress is relatively low. (Unless you are the type that worries all day long about your trades. If that is the case, put this book down and take up another hobby. You will live longer.)

• Intraday trading is more difficult, more exciting, and potentially more rewarding. It requires you to pay attention to the markets almost continually, making calls to your broker as the need arises. It can be and should be considered a full-time job. You will have many more trading opportunities, and you can trade more contracts with a given amount of capital than by EOD. This increases your profit-loss (risk) potential. Trading on an ID basis can cost from 5 to 15 times more than EOD in monthly operating expenses. You must have the temperament for this high-stress game, or you are doomed.