.

"MONEY AND RISK MANAGEMENT"

- MAKE IT YOUR RELIGION
As a trade ·t · ·
r, 1 1s important to focus on the following three areas:

• Understanding & knowledge about the market: Fundamentals, technicals (charting, price levels), and most
importantly the "feel" of the market/ability to understand the stories which the numbers on the screen are
telling you.

• Trading skills: Development of skills like decision making, mental toughness, flexibility vs. being rigid in your
approach to changing situations, concentration, memory etc.

• Money and Risk Management : In detail below:

Market Knowledge assists traders to determine what the market will do & hence, make calls on the market. The
ability to understand the market does require high level of intellectual ability, something all of you possess. It is
important to mention though, that some traders make the mistake of focussing too much on knowledge (rather than
feeling & judging the market) or too much focus on the numbers without understanding the macro or the big game.

Trading Skills are very difficult to develop. While some traders possess "all" the necessary skills to succeed at the
top levels, this is quite rare. However, developing the skills required involves challenging beliefs and habits which
trade rs have developed over their lifetime, an extremely difficult task. Nonetheless, many of these skills can be t
changed with suitable guidance and experience but it requires traders to first realise what is missing and then, make
persistent and strong efforts to change it.

Money Management is something which can be learned, yet surprisingly is the "main culprit" for bad or
underperformance for numerous traders. Hence, we are going to focus on getting our "RISK & MONEY
MANAGEMENT' right -focus on it so much that we make a PLEDGE to ourselves to make it our RELIGION to be
followed.

RISK MANAGEMENT
Risk Management is about taking the right amount of risk so that you realise the full potential of not only your
trading strategies but also your whole trading career, while not jeopardizing it. The "right" amount of risk a trade r
should take is very personal.

- It depends on a trader's understanding of the market. A trader with deep understanding of a particular
market situation will perceive the trade as less risky compared to someone who has a lesser grasp at that
time .
- It depends on a trader's psychological makeup. The risk should be such that the trader should be able to
deal with any losses, and not lose his/her confidence.

Of course, the risk taken in the market should also make sense given the expected reward a trader seeks to derive
from the trade - "the RISK-REWAR D ratio".

l l Page
MONEY MANAGEMENT ac co un t balance during the day, during
optim ising a tra de r's
Money Management is about ma
naging and .. 0 t~~
ly about making..,'"
r 1 g Is no t on
d'n • ney, it \
.
dur·1 th e month, during the year and during yo
ng
ghout
ur wh ole car ee r. ra
your entire trading career! It's a CRIME to give your hard earned 11\
abou t "KEE PING THE MONEY" throu "'~\
back to the markets.
sely linked.
Risk and Money Management are clo
NAGEMENT
EFFECT OF BAD MONEY AND RISK MA
r
ment. But th e REAL loss is much rno
We often talk of money lost in trade
s reflec ting bad
ss, reduced con
mo ne
fide
y
nce
an d
etc
risk
. Th
ma
is co
na ge
uld cau se mo re "financial" loss because :f. .
it is the PSYCHOLOGICAL loss like stre
es makes or breaks a career.
"missed opportunities" and sometim
CAREER
ME AN S LO NG , PR OF ITA BL E AN D ENJOYABLE (LESS STRESSFUL/)
MENT
GOOD RISK AND MONEY MANAGE
IN TRADING
guida nce , it is im po rta nt to rem ember that trading is highly
e you advice and
CAUTION: While I, as a manager, giv uld co ns ide r the advic e and guidance given,
truths in trading. Each trade r sho
personal, and there are no absolute
ich works for YOU.
and work out a 'Trading System" wh
this are :
Three ways in which we can follow
E MANAGEMENT
RISK MANAGEMENT through LOT SIZ
PITAL MANAGEMENT
MONEY MANAGEMENT through CA
MENT
NEY MANAGEME~T through CORRECT PROFIT AND LOSS MANAGE
MO
 RISK MANAGEMENT THROUGH LOT SIZE MANAGEMENT

There are only two tools through which a trader operates in the market - the first is when to enter the market and in
what direction, the second is with how much size to enter the market (lot size).

Lot size is probably the biggest weapon a trader has in their arsenal to control the risk. Following are a few
comments on how to use this weapon and also few observations in which you all can work upon

• DON'T FORGET USING ONE LOT WHEN YOU GROW BIG

o Irrespective of how big a trader one is, a trader should be able to use the whole range from one lot
to his maximum lot size quite frequently. Very low lot size (say one or say five lots) is used by many
"big" traders in the following ways:
• When the going is not good, as a way to get back to the basics
• To test the market at Various times (such as the opening)
• To enable them to have a feel of a segment of the market which they need to watch, but do
not still have a strong enough view to take a position
• ENTERING THE MARKET
o Many of you have fixed lot sizes which you are used to with, ex. If you have a limit of 100, you will
use either 25 or SO depending upon the trade opportunity, ideally you should be using all numbers
from one to SO. It is not possible that you can categorise all trading opportunities into just three
categories. Trading is all about getting the risk-reward ratio right, and lot size is the key variable in
doing so.
o Also, when it makes sense one should look at " Building positions" (not averaging) at different price
levels rather than hitting all at one go. "Building positions" means that you are sure about how much
lot size you want to build your position but you do not have exact price in mind but have a range of
price level in mind on which you want to buy. Building positions is a good trading strategy.
"Averaging" is when you have already bought what you wanted to buy, market surprises you
thereafter & you go and say buy more (often double the size !) to persist with your view & thinking
you will make good some of the losses of your original wrong trade. This is a clear NO NO in trading.
"Never add to a losing position if you didn't plan for it".
o Percentage of Limit -A key concept in determining the clip size or position per trade is to determine
.what percentage of your maximum limits you should use (say if your limit is 100 lots, you want to
commit say 20% (20 lots) or 50% (SO lots) of limits to this trade). This percentage figure should
always be in your mind. Quite often I find traders thinking seeing only the "opportunity of the trade"
and committing lot size to it based on that without thinking what "percentage of limit" they are
using.

• EXITING THE MARKET

o I find many traders generally get out of their entire position at once. Just like getting in, one should
use lot size to partially book profits or losses. Couple of key thoughts on this are :
• In general, the risk of the trade increases as the profit in the trade increases, making it
necessary to book partial profits in order to keep the risk-reward balance right (unless it's a
sharply trending market).
• Partial booking of profits makes it sometimes easier to carry the winning positions longer,
thereby maximising profits.

3IPage
• USING HIGHER CLIP SIZES
o In general , when trying new clip sizes
that a
• Do not suddenly double or increase by 50%. Trading clip size should increase in such a way
up
trader is stretched but is not psychologically and financially highly uncomfortable. To move
faster, a trader can increase his size more often, but by lesser amounts. By increasing trading
size too much, a trader risks suffering from a larger loss which it is harder for him to make back
-
as it is more than his "normal" profits. Quite often, we have found that traders do the opposite
e,
whenever they are having a good run, they insist on increasing their limits by a big percentag
losing sometimes the moment limits are raised & then, taking weeks to get back on the feet
again. The key is lesser percentage increase but more frequently.
• Quite often, when a trader increases his clip size he is uncomfortable at first, and hence often
to
loses money on the first few trades. If clip size is not raised by a large margin, it is imperative
keep trying as there is a good chance that the second or third try will be right, restoring your
take
confidence. Many traders go back to smaller clip size after say one attempt which failed and
months to try again.
• A trick often used by traders to get 'comfortable" with increased clip size is to hit with the new
clip size but then, quickly scratch the extra amount to get back to the old clip size. By doing so,
traders are able to get used to trading with higher clip size.
• REDUCTION OF LIMITS
lower
o EGO HIT IN TRADING LOWER SIZE: Time and again I find that traders do not want to trade
sizes because they are "big" traders. This is absolutely wrong. Often, a trader has to trade lower
s, a
sizes because of higher risk in the market, or because he is not sync with the market. Sometime
at
trader has to go to very low sizes in order to get back to the basics. ALL traders have to do this
once
certain points of their career, and there should be no shame in doing so. The good part is that
this
a trader is back on track, he should scale up quickly back to his previous trading size (again, I.find
missing in many traders - ability to go back to "normal" quickly - it should take a day or two not
weeks).
that he
o REDUCTION OF LIMITS IN THE SYSTEM: Ideally, a manager should never reach a position
has to reduce limits in the system. This is because
• A trader should be self-disciplined and should ask to reduce his own limits when required.
• If it has been agreed with the manager that a trader will trade with lesser limits, trading
even once with a higher limit is considered a serious breach of conduct, and an integrity
violation. In many trading firms such violations are a reason for termination.

• ADJUSTING LOT SIZE AS PER NATURE OF THE MARKET

This is obvious but not done so many times. Few thoughts on this

o When experiencing a "bad" day, reduce quantities. When experiencing a good day, be more
aggressive in the market
nature of
o Even though you are doing high frequency short term trading, understanding the "macro"
the market quite often helps in making this decision.
o Volatile markets like the one we have now, obviously ca lls for lower lot sizes than normal.
o Be careful using bigger lot sizes closer to end of the day or just before a data.

4 jPa ge
 • UNDERTRADING AND OVERTRAOING -GETTING RIGHT THE "RIGHT RISK-REWARD RATIO"

This is a combination of lot size, frequency of using the lot size and your psychological make up to take risks.

In all pits, we find traders who are probably the first ones to spot the trade but last one to click the mouse.
At the same time, we have many traders who are clicking away all the time not evaluating the correct value
of the opportunity.

An obvious reflection of under trading and over trading is the number of round turns on standalone basis
and vs. gross/net profit. The main aim is profit not volume. But market pays a trader (by providing
information, opportunities to make money etc.) in return of the "service" of providing liquidity and taking
risks. Hence, a certain number of round turns and presence in the market is essential to make money and
capture various moves/opportu nities. If you are trading below that number, you are under trading. On the
other hand, if your round turns are high but you see every movement as an opportunity which is not (this is
evident if you are not getting enough "gross" profit) or if you paying too much transaction cost on taking
opportunities which do not give you "net" profit (this is evident if you are getting gross but not net profit).

Related to this is your capacity to take "risk" (the right amount). Lot of times under trading happens because
we are "afraid to lose". It's part of psychological make-up and tough to change but by being constantly
aware and working upon it, it can be improved. The key is to understand that in trading you cannot make
money if you are not willing to lose.

RIGHT RISK-REWARD RATIO : Ideally the ratio should be such that you can emotionally and financially deal
with the losses while maximizing return

► Too much risk ➔ Trader may not survive long enough to reap the benefits of a successful trading strategy

► Too little risk ➔ Trader may not realize the full potential of a successful trading strategy

MONEY MANAGEMENT THROUGH CAPITAL MANAGEMENT

This is the "money" in "Money Management". Money is your "Account Balance" (or money made) for the Day, for
the Week, for the Month, for the Year and during your Career. Traders have very good sense of this "money" if they
are independent traders, risking their own money. Using someone else's money whether, it is a fund or a group
company's capital, makes this assessment psychologically a bit blurred. If a trader is trading " futures" (like we do)
rather than "cash", it makes it even more blurred as the capital is leveraged multiple times.

• THINK AND ACT LIKE AN INDEPENDENT TRADER

One of the first principles to get money management right is to treat your account as if you were trading your OWN
money. The feeling, the thinking, and the kind of decisions you take when your own money is at risk is very
different. When a trader trades with his own capital then -

• There is a limited ca pital you have ... Once that capital is lost in the market, you are out of the business.
• There are certain costs in trading which eat up your capital even though a trader might not be losing money
directly in the market. Hence, a trader has a limited time in which he must learn to trade, and stay in the
market without making money (at least to cover the costs) .
• In a company, a trader makes money in Year 1, gets his bonuses and puts it in a bank. In Year2, if he loses,
his Yea r 1 bonus is untouched. However, an independent trader would have to always worry about
5 I Page
 . . ce "Keeping the money' becomes an
preserving what he has earned ever since he started trading. Hen '
important part of trading.
. ti nd not lose what you have made in
5t
Hence, if you want to have a long career in trading, make money consi en Ya
the past, you have to think and act like an independent trader.
. a ital & if they are focussed on how
The other extreme : There are some traders who are too careful about th e'r c P k h • t d'
. II) his might ma e t e1r ra mg more
much they are losing or making (especially if converted into local currency 't t' th t d
. h aggressive or conserva 1ve e ra er
risk averse. Hence, the above thinking has to be adjusted depending upon ow
is and we have to find the right balance.

• HOW MUCH CAPITAL TO RISK

TRADING DECISIONS = OPPORTUNITY IN THE MARKET + HOW MUCH CAPITAL YOU ARE RISKING vs MONEY
IN YOUR ACCOUNT

EACH TRADE, EACH DAY, EACH WEEK, EACH MONTH AND EACH YEAR WHILE TRADING YOU HAVE TO KEEP IN MIND
HOW MUCH CAPITAL YOU ARE PUTTING AT RISK vs MONEY IN YOUR ACCOUNT

Few thoughts

• For each trade, you have to estimate the Capital you are risking by calculating from
o Lot Size
o Market movement which could happen (normal case and worst case)
o Your Stop Loss (including factoring that there will be enough liquidity in the market to cut)

Compare this "Capital at Risk" with what your Account allows you to lose. A trade however attractive is a
bet at the end of the day. Hence, the capital you are risking should be something which you can afford to
lose both financially and psychologically.

• Trades should be seen not on a standalone basis, but as part of a bigger pict ure. Each trade should be
considered taking in to account how a trader is doing in the market on his last trade, today, recently, and
ever since beginning to trade. Only when a trade is considered in the context of the overall performance of
the trader, can an informed decision be made.
• You have to be conscious of the "REAL POTENTIAL LOSS" of the trade (not what you hope or your view but
what market movement could cause). Usually, this is much greater than you assume at first. Check yourself
to see if you can afford the trade?
• A trader must determine how much capital to risk on any given trade or during a phase of the day or during
the day taking into account
o The psychological & emotional impact of the trade
o The account balance

• Limits is your Capital: If you were managing a fund investing in cash market s, you will be given "some" (limit)
money to trade as "Capital". If you are trading in futures, you are given "limits in lot sizes" as Capital. Limits
(the margin money put by the firm thereupon) is your Capital & your Account Balance is your Return (Profits)
on this Capital. Trader should understand the value of limit s. Limits are a resource given to traders in order
to enable them to earn money. Clearers ask for margin money to be kept with them from our company

6 IPag e
 _based on limits allocated to traders - not only on positions traders run. Treat this as a precious resource,
being aware of it all the time.
By the same logic, if a limit is unused for a long period of time, kindly ask for reduction in the system.

The other extreme : There are also few traders who are "too careful" about their capital, they are too focussed on
the capital and not the opportunity in the market. Here, the balance needs to be restored .

• IMPORTANCE OF A GOOD START

It's crucial to create some cushion or have a positive start (either of the day, month, Quarter) as it will determine
our psychology and risk appetite for that day or part of that period.

Ex.:- some traders lose good amount of money at the start of day (or at the start of Quarter), their psychology
gets changed and while some good opportunities come later during the day, but then they don't have any
cushion or vey less cushion to take risk, to recover that loss.
A good start can lead to a good finish, while a bad start can spoil the entire day.

• CONSISTENCY

Being consistent: An important measure to check one's consistency (Kindly do this analysis for yourself for say
last 6 months) is:
i. How many days per period (week/month) you end up in positive.
ii. Ratio of a period (week/month) p/1 to sum of all positive p/1 days.

If both the above numbers are high, then it implies you are consistently making money and are not giving it back to
the market. We should always be consciously thinking of protecting whatever we have made and not give back even
a single penny easily.

Why it is important to being consistent? It helps you psychologically in more than one ways -your account balance is
growing at a steady pace; you are more confident to put in your next trade.

It is also important to realize that you cannot avoid being negative on few days. It is part and parcel of the job as we
are continuously taking calculated risk in the market. But if we are conscious of being consistent, then we should be
trying all the time: a. not to lose all the money that we have made on a particular day, and b: try hard enough to end
up in some positive number if the day is already in RED.

So, important thing is to have a measure of our consistency at the back of our minds and then keep thinking about
ways to improve upon it.

Clarity on Consistency vs Variability in P & L due to Opportunity in the market

There is always money in the market. But there are days when the market is good. There is good movement & more
important it is what you like to trade & you are in sync with it. On these days, one should really try to put maximum
effort & should try & ensure that you are in front of the screen as long as possible. Also, please do remember there
will be few "months" & few "years" in which markets will be "easier" to trade or offer "lot of money" easily. This
could be due to a cyclica I feature (like Central banks changing interest rates frequently) or structural feature (like
more people trading it now, regulatory issues etc.). In these months, you should make your "yearly" budget. In

71Page
these "years", you should make enough to take care of not so good times. In some of these years, you can probably
make enough to last a "lifetime" .

Whereas there are times (days/months/years) when the market does not have enough money (it still has though but
it is less and hence, harder to get a share of the pie). On such days, it' s important not to try too hard also as this
could result in making a loss or a series of losses resulting in loss of confidence. At the same t ime, you should make
enough to survive.

• YESTERDAY IS HISTORY

There is a thought process which runs in many of the traders to sit on past laurels. Say a trader made profit of S
500,000 in the previous year. Say if he is not making any money this year, both from company point of view as
well his personal trading achievements he thinks that it's ok since he did it last year. This is a psychological issue
as those who think that way will find it difficult to get out of their rut and move forward. From company's point
of view, if the trader is putting in the effort and moving in the right direction, we stand behind him during his ups
and downs which are inevitable in this career. We all need to keep this thought in mind that whatever revenue
was made in previous year is already gone and dusted - bonus has been paid on it & expenses have been
covered. For the New Year, the clock runs again, afresh, the cost meter runs every day- for the trader, for the
branch and for the company.

Bl P ag e
 of these years, you can probably
these "years", you should make enough to take care of not so good times. In some
make enough to last a "lifetime".

enough money (it still has though but

Whereas there are times (days/months/years) when the market does not have
nt not to try too hard also as this
it is less and hence, harder to get a share of the pie). on such days, it's importa
At the same time, you should make
could result in making a loss or a series of losses resulting in loss of confidence.
enough to survive.

• YESTERDAY IS HISTORY

Say a trader made profit of$

There is a thought process which runs in many of the traders to sit on past laurels.
company point of view as
500,000 in the previous year. Say if he is not making any money this year, both from
This is a psychological issue
well his personal trading achievements he thinks that it's ok since he did it last year.
. From company's point
as those who think that way will find it difficult to get out of their rut and move forward
stand behind him during his ups
of view, if the trader is putting in the effort and moving in the right direction, we
mind that whatever revenue
and downs which are inevitable in this career. We all need to keep this thought in
it & expenses have been
was made in previous year is already gone and dusted - bonus has been paid on
day - for the trader, for the
covered . For the New Year, the clock runs again, afresh, the cost meter runs every
branch and for the company.

Bl Page
 PROFIT AND LOSS MA NAGEMENT
MONEY MANAGEMENT BY CORRECT

~
e are not .talking about "no rmal" losse
s w rc
·
h' h happen every other day, and, in fact, should happen otherwise
Here, w .
rrsk . Here we are talking about exceptional days -
atrader is not taking enough

Big losing days, and

: Multiple successive losing days

t
/
f!§J,OSING DAY
will be sign ificantly affected by the loss eith
er psychologically
in whi ch a trad er
Abig losing day is defined as a day
by means of:
or/and financially. This can happen
nomic news (like data) is
rt from exc epti ona l case s, the announcement of most of the eco
• Sudden Move: Apa moves occur without any
une xpe cted new s is gen era lly non -economic. Sometimes, big
known. Most of the
market.
news, but due to a break out in the to liquidity being
mov e doe s not allo w you muc h time to react. Furthermore, due
0 A sudden ntions are there. Once a
d from the ma rke t, it is very diffi cult to execute even when the inte
remove ept to follow the first
mov e occ urs in the mar ket, a trader cannot do much about it exc
sudden ER RUNNING.
ciple of BE ON YOU R DES K WH EN YOU HAVE A POSITION OR ORD
prin
at the FIRST AVAILABLE
From com pan y's poin t of view , a trader is required to cut the loss
o
size of the loss.
OPPORTUNITY irrespective of the except in crisis.
nts tha t cau se large sud den mov es in the market are generally rare
o Fortunately, eve e been numerous
occ ur, they are usu ally follo wed by increased volatility. There hav
When they do vered all of it on the
of trad ers who lost big mon ey in sudden moves, only to have reco
instances TRADE, but in many trades
e day . How eve r, they wer e able to recover the money NOT IN ONE
sam ur, the lot size has to be
allowed . When sudden moves occ
which the ensuing volatile markets rd to lose more. Also, it is
, and since the traders cannot affo
reduced due to the volatile markets know that sudden
orta nt not to get hur t psy cho logically by the event, a trader must
extremely imp that not much can be done
hap pen , and it is a risk we mus t take . A trader should remember
moves
of it bac k rather quickly because
mitigate the risk of sud den mov e, and that it is possible to get all
to
of ensuing volatility .
• Slower Move:
o This could happen because of practice and knowing
take of holding on to a position . This should get minimised with
• Mis
nce.
the repercussions of it with experie
pening is .
market. Few tips when this is hap
• A trader is not in sync with the nager. There is a good
r colleagues/research analyst/ma
• Discuss the markets with you t is being
tion is being missed, or the marke
chance some crucial piece of informa
ana lysed incorrectly.
e to be believe in yourself.
• Do not bre ak down and continu

to remember tha t.
After a BIG losing day it is important
t to lose
objective the follo win g day is "no
ctive t~e following day is not "to recover the mo ney". The
• The obj,e fact, if a trader
bac k the con fidence and to get back in sync with the market. In
money' · The a,m is to get
9j Pa ge
 • • ·
makes too much money the following day, this d h h t ok too much risk and probably was luck
indicate t at e o Y,
but did not do trade correctly.
• The target after a day of big losses should be to end in a small positive.
• It is important that following the day when he has finished in small positive, he
should ramp up his trading
quickly so that it reaches normal level. Quite often, we find our traders doing
the opposite - they try to
recover everything back the following day {& in the process lose moreJ and they take weeks to get
back to
their normal trading. It's verv tempting psychologically to go for this but it is very important not to
do this
& please take note of it.
• To achieve the above, a trader has to :
o Reduce the lot size the following day to a level where even if he gets it all wrong
again, the loss
won't hurt him. Trader should know that he needs to begin small, whether it is
half or 1/3rd or
1/lOth of his normal size, he knows the best. Also, be aware that this is just for start
to ensure correct
psychological and trading approach. Once this is right, a trader should approach
the manager to
have his trading limits revised upwards.
o Choose trades conservatively.
o Be aware that the loss can influence a trader psychologically, affecting his confiden
ce.
STRING OF SUCCESSIVE LOSSES

This means you have not hit your stop losses for the day but you are ending losing
on consecutive days or
consecutive months resulting in overall big financial losses and reduced confiden
ce. You have to make lot of effort
to get out of it. Few thoughts would be

In the case of losing for a few consecutive days -

o Take breaks by spending more time reading or talking to your colleagues/manager.

There is something
you are missing out on in the market, which you may have to learn from others.
o Do keep trading although with small lots, as only by trading you will get the feel
back.
o Sometimes, you are just out of form like a player. Just like you are out of form, you will
get back in to
form, but you have to keep making efforts in the right direction .
• In the case of multiple consecutive losing months-
o A change in market behaviour might have occurred, resulting in a drop in performa
nce. This happens
especially with traders who have spent significant time trading. When traders begin
trading, they figure
out a trading style which works, and are able to make good money. As a result, those
traders stop trying
new methods. When markets change they keep trying the same thing.
• Market behaviour could change because of many reasons, but few prominent
ones could be:
• Market cycle: ex. bearish, bullish or static, Trending vs. range trading
• Traders themselves change the market. Just as our traders notice a pattern
in the
market and start taking advantage of it, others do the same. After few days, this trading
behaviour itself changes the way market reacts to situations
• Different segments of the market are active at different points of time: ex. sometim
es
spreads are active, sometimes outright.
• Trading level in the markets has moved up, and traders that previously did well
are
languishing behind if they are not adapting with the changing markets.

How to handle a string of successive losses? We have noticed two patterns to this.

• Change when needed - There are traders who are focussed on making large amount
of money from
strategies which are currently working for them, and neglect trying out other strategie
s. This could be fine.
But when the warning signals start to emerge that the current trading strategy is not
working, the trader has
10 I Page
 to be guick to realise this (successive losses could be an indicator) and start figuring out new ways to trade.
Sometimes "his kind of markets" will come back, but this is not guaranteed, and they may never return.
Hence, you have to start moving as you cannot just live on HOPE.
• Keep expanding your arsenal - Some traders put much effort into constantly learning new trading styles.
They spend time, and allocate some P&L (say 20% of what they make), to moving up the curve all the time.
This is especially true in the early stages of a trader's career where it is possible to try out new things and
work out few ways which works for you and not just sit on one successful strategy.

HANDLING PROFITS

It is important to mention here that the same principles of being very careful in trading and realising how
you are behaving psychologically applies on days after you had a very good day or are having a very good
run of successful days

AFTER A BIG PROFITABLE DAY

It could be true that market is offering very good opportunities & you are in sync with the market. It is possible that
this continues the next day. Therefore, one should continue to make the best use of this situation and trade
aggressively. This is indeed true but it is equally important to balance it by

• Being "aware" what your psychological state is as this will influence your assessment of "risk" in the trade.
• The objective is not to lose all the "big" money you made the previous day.
• Sometimes things could be very different next day and one risks losing all one has made.

Hence, after a BIG day, one needs to "begin" on a careful note & then, progress thereon on being
aggressive/defensive.

AFTER A STRING OF PROFITABLE DAYS

I can recall so many instances of trader coming and asking for an "absurd" limit increase once there were a string of
profitable days. While a "normal" limit increase in line with Risk and Money Management principles is fine, to ask
for a very high increase just because you have been having a very good run could be because of being at a
"psychological" high and this needs to be checked.

BEING UP BY A GOOD MARGIN & THEN, ENDING THE DAY AS LOSING

It would have happened to many of us but it's a crime if it happened because of bad money management.

Example:

Background

An experienced trader, can do $20,000-$40,000 on a good day. But then, he had a bad period in which he lost 20% of
his total P&L.

lllPage
The event
nd s.
took 600 contracts long of in Fed Fu
The trader was up $12,000 and then . ued to lose, finishing losing $12,000
. . . ·
. . . tin
went two tick against him) and then con
He lost all of his gains in this trade (it
.
more (by doing some more bad trading)
management because of thre e reasons .
This example shows very bad money . hen you are not doing so good lately.
11Ywt from + $12,000 to zero , stop there
uldn't risk it all in one trade ~specia
1. When you are doing well you sho
f when you have a bad strike, you wen
2. You should be able to stop yoursel . ains is also lost money).
you r stat us. .
and try to re-e valu ate ing 9
,000 that day and not Just $12 ,000(los
3. You should look at it like losing $24
• b should be aware of you r
g wel 1 ut you
e you r prof its when you are doin st
It is very imp orta nt to try and maximiz duri ng the last cou ple of day s?) Your atus
ly? Are you losing or gain ing
curr ent status (are you doing well late
helps you take the right decisions.
dictates you r money management and

LOSS
A NOTE ON THE CONCEPT OF STOP
There are two types of Stop Losses
t principles, mor e dep end ent
levels" rath er than money managemen
• " Price" based: These are based on "
upon the mar ket/ trad er. in a trad e or in a day. They __
" bas ed: The se are base d on " how much money" you are willi ng to lose
• "Mo ney age men t principles. The ·
den t of you r view or pric e. The y are purely influenced by mon ey man
are indepen losses based on
com pan y belo ng to this cate gory . But you should have you r own stop
ones imposed by the past, wha t is
are doin g dur ing the day , how wel l you have been doin g in the rece nt
the trade, how wel l you
So the y can vary quit e a lot.
r acc oun t bala nce , wha t is you r " psychological" state to take hits etc.
you
ng whi ch hur ts but keeps "yo u in
Loss in general is mea nt to be somethi
From company's poi nt of view, Stop
eed say som ethi ng whi ch you
e". The re can be diffe ren t view s but one view is tha t it should not exc
the gam uld nev er lose on you r
e bac k in 15- 20 day s (wh ich itse lf is lot of hard work). Hence, you sho
can not mak ing upo n the
or two of P & L. Of cou rse, man y of you have & should have dep end
.. "wo rst" day say a mo nth
..,; l lesser than that.
trad er & circumstances, stop loss leve
hit bef ore you get a chance to
imp orta nt tha t Stop Loss es sho uld not be small enough tha t they are
It's very
with this problem as wel l
trade. We have fou nd man y trad ers
fully . You can also revise
orta nt tha t you dec ide Stop Loss levels with you r manager very care
Hence, it's imp s. But once
gh .the y sho uld not be very freq uen t to avoid ope rati ona l pro blem
the m every now & the n thou
the "ne xt available pric e"
, the y are sac rosa nct. Onc e you reach them , you have to get out at
decided e of cutt ing in pan ic,
e loss or wid e bid- offe r gap (to pre ven t these "ext ra" losses becaus
irre spe ctive of mor
the exit befo re the levels are hit.
its bes t to plan for it & in fact, plan
scipline but it creates a serious
do not get out afte r it is bre ach ed, it is not only a serious act of indi
If you
rules.
trus t you. You are not respecting the
inte grit y issue. This means we can not