Nine Ways to Stay in the 10% Club

01/05/2010 12:01 am EST


Trading is inherently risky, but by following nine fundamental money management rules, you keep your capital safe while building your trading experience.

My nine rules to keep you in the 10% winning club versus the 90% of traders who lose money are:

1) Look for high-volume markets with a thin spread - Orders are filled quickly and it has high volatility, so there are opportunities for two to four good trades during the day. The E-mini S&P500 index future is a good example of this type of market (each point is worth $50, split into four ticks of $12.50, and there are four contracts a year traded on the Chicago Mercantile Exchange).

2) Only risk 1% of your capital per trade, then your capital can absorb 100 consecutive bad trades - Even the best systems can expect 20% losing trades, so the 1% rule gives you room to maneuver.

3) $10k-$15k is the minimum capital you should have per E-mini S&P500 contract traded - If you lose $1000-$1500, it only represents 10% of you capital, which is recoverable compared to a $3k account where the same loss equals 50% of your account. Consequently, you are more likely to lose the remainder of your capital rather than recover the loss.

4) Limit the hours you trade – We prefer the first 60-90 minutes, when typically, there is a good trend before the lunchtime chop. Many professional traders trade this time period.

5) Limit the number of trades you make per day – Two to six trades is good as the E-mini usually has up to three trends per day, and you should aim to catch one or two out of the three. Overtrading racks up commission fees and increases the risk of revenge trading. A few ticks of loss per trade quickly mounts up—four trades fired like a machine gun can easily become four losers, and at eight-tick stops, that’s a $400 loss, or 4% of a $10k account. Patience is key, so stalk your trades.

6) On any one day, stop trading when losses hit 5%-10% of capital – This amount is recoverable, but indicates you are reading the market wrong, so stop, evaluate your errors, and record them in your trading journal.

7) Keep a trading journal listing all your trades - Over time, the mind dismisses bad trades and habits. Include annotated charts and notes about your emotions. Key things to note are:

  • Are you trading your account and not the charts, or taking desperate trades having made a couple of losers, rather than treating each trade uniquely?
  • Are you taking negligible signals because you have missed a good move, resulting in chasing a trade which you are stopped out of on a minor retrace, or you opt for a countertrend trade purely on the thought “It can’t possibly go any higher?”

8) Base your stop loss and target strategically from the charts, not an arbitrary number of points - For example, use price levels at double tops, swing highs and lows, or pullbacks to moving averages. Then you can place tighter stops and take higher profit-to-risk-ratio trades by keeping your focus on the chart, and trading what you see, not what you think or feel.

9) Be patient between one EMA, or pivot, to the next - This is one of the hardest things to master. To help, trade at least two contracts, keeping one for two to three points, whatever your first target is, and then let a runner go with a break-even stop. If it goes your way, you add gravy to the first. One good runner is hard to beat with lots of scalps—your results will amaze you!

By Marc Nicolas of

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