In the previous post I gave an overview of the analysis element I use, and in this post I’ll discuss the money management system that complements this.

The original purpose when putting together the analysis system was for it to be a training tool to help me develop the ability to place trades with the same effortless manner that professionals such as Phil do, i.e. a setup occurs, I take the trade without hesitation or mental anguish, and I accept the outcome win or lose, then move on to the next trade. For me the analysis system I outlined helped me take many steps towards achieving that goal, however, as I mentioned earlier, I struggled to transfer that ability to other systems, which kept returning me to square one.  The obvious solution was to build a money management system around this analysis technique, since I understood it, had done extensive testing on it, was comfortable with it, and, above all, I am able to trade it with relative ease.

Based on this premise, the foundations I used to build my money management system are as follows:  

•  My daily goal is to trade my edge whenever it occurs on the GU and EJ pairs.
•  If I can achieve my daily goal, then my results over time will be consistent and I should achieve an average daily yield of 100 Pips, over approximately 20 trades (10 trades per pair), based on forward and backward testing.
•  The risk to my account should be kept to a maximum of about 1% per trade, based on a nominal £5K starting account, and with a larger account the risk is further reduced.
• Growth is based on increasing lot size not pip yield.
•  The plan is based over 100 trading days, and is broken down into 5 phases of 20 trading days length, within which there are 6 stages, each of which requires a target achievement before progress to the next stage is allowed.
• If a stage target is not achieved the stage length is extended, as opposed to having to make additional pips over the following days.
•  The plan should define on a daily basis what lot size I am allowed to trade, which goes hand-in-hand with the analysis element which tells me what my stop and profit are going to be (20 pips) per trade.
•  If all targets are met over the 100 days the plan would grow a £5K account to over £100K.

I guess the point to make is that the whole plan stands or falls on whether or not I can be consistent with my trading; in terms of if the trade setup occurs I take it no matter what.  When targets have not been met I can always trace it back to me not being consistent, i.e. not religiously taking the trades when they appear, conversely, when I’ve had a storming day it just happens to be a day when I’ve followed the plan to the letter – strange hey? 

Also, please note a subtle point, which is: the objective is not to make £100K.  It is purely a by-product resulting from: 

1. Consistently following the trading plan.
2. Keeping risk low.
3. Being sensible and consistent with regard to increasing position size.

 I’ve no doubt that any money management strategy that follows these principles would result in significant monetary gains.

Please note if you play around with the daily pip target in the spreadsheet, say by reducing the daily pip target by 50% then you must extend the number of days per stage proportionally, in order to maintain the risk to a maximum of about 1%.

As with the analysis technique I hope you find something of interest in the spread sheet that you can incorporate into your own strategy.  One point I meant to say in my last post, but forgot, is the system I have described is something I have extensively tested and proven to myself to work according to my definition of “work,” which may not correlate with your definition of “work.” If you do find the analysis and/or the money management of interest and something you may use yourself then please, please, please, do the necessary testing to prove in your own mind the validity of the approach. Again, this is a point that took me a while to grasp, which is if you can't convince yourself of the validity of a system or approach, through rigorous testing, then you've no chance of making any money with it on a long-term day to day basis - as soon as you go to place a trade a voice will pop into your head (well it did mine) saying "are you sure this system works!"

In my final blog post I’ll discuss some of the mental problems I’ve had with trading and some of the things I’ve done to overcome them, which, again, depending on the stage of trading you’re at you may find of use.

Cheers and consistent trading – Dave Search.