Making Money, dosh, mullah

It is a phrase I will never forget. Sitting in the offices, some six years ago, of one of the leading futures traders in the country. "I don't come to work to earn a living, I come to make money." Unashamed. Unabashed. Un-British even you might say. Nevertheless there you have it from David Kyte, CEO of the eponymous company. He was the first person I interviewed for The Mind of a Trader. Little wonder the book became an international bestseller.

So if you are trading and trading stock futures to make money too then watch for these money issues.

Getting it wrong

Online traders appear to believe the following falsehoods :

• Picking the right stock is the most important aspect to trading well at stock futures
• Some trader simply have a better source of investment tips than others and it is they who make the money in stock futures
• You should scour every newspaper, magazine and web-site to get good returns
• You need more friends frequenting City wine bars
• The Daily Mirror used to be a good source of tips
• The Sun is now a good source of tips

Wrong! Money management is probably one of the easiest and best ways to improve trading performance.

Uninteresting Money Management

Money management is about as exciting as a date with an actuary. Unfortunately for online traders it is also essential to understand if we are to play the game and make money. Consider the simple fact that if you suffer a 50% loss, it will then take a 100% return to just break-even. Not a nice prospect is it? That's why you shouldn't leave home without money management.

Whether a trade is worth making depends on the risk to reward levels, not just on the signals your system provides. By risk I do not mean the size of your position, but the size of your potential loss.

Imagine you also have £10,000 to trade with in total capital. Your reasoning should run as following:

• How much of my total equity should I be willing to risk? Most expert would advice anything from 0.5%-3% of your total equity per stock future trade.
• In this case since you have £10,000 in total equity, the most you should be willing to risk losing in one trade is £300. Remember for every 1p a stock moves the stock future in a UK stock gives you £10 shift.
• If you split your £10,000 into 10 equal lots of £1000 - in order to diversify your portfolio and reduce risk then you are risking £300 out of £1000 for each trade. So you have a stop loss of 30%.

Now, a 30% stop loss does not mean you have to wait to face a loss of 30%, but just that at that point you should exit. That way on any one trade you only lose 3% of your total equity. So even if you have 10 losing trades in a row - you are down only 30%.

But what if you do have 10 losing trades? Well, after 3 consecutive losses you should stop and paper trade (ie. shadow trades you would have made) just to see how you are doing. Experts Bill Lipschutz, former Global Head of Forex, Salomon Brothers puts it like this, "With a trade you always look at a multiple upside to downside. You can look at the percentage probability of a rise or a fall. The problem with that is that you may have many trades that are fifty-fifty. So you are trying to set something up which may have a 8 to 1 pay off. The fact of the matter is that if you put on a lot of 14 to 1 structural ratio spreads, you are going to make money, because you have to be wrong 14 times in a row to lose for every once you are right. "

Remember

The most important thing for the online trader is not the stock tip, it is money management combined with sound research. Don't you forget it now, you hear?

Don't forget ADVFN readers can email me on alpeshusf@tradermind.com to ask any questions about stock futures and details of free info pack on USFs. If you want to check USF prices they are available on ADVFN.