A Trader's Money Management System: How to Ensure Profit and Avoid the Risk of Ruin (Wiley Trading) [Hardcover]

Bennett A. McDowell (Author), Steve Nison (Foreword)

Book Description

Publication Date: July 8, 2008 | Series: Wiley Trading (Book 335)

Money management may very well be the most important piece of the trading puzzle. In A Trader's Money Management System, expert Bennett McDowell provides time-tested techniques that can turn a losing trader into a winning one?and take the winning trader to an entirely new level. In revealing his personal approach to staying out of trouble in the financial markets and maximizing profits, he offers comprehensive insights into:

• The psychology of risk control as well as the finer aspects of setting stop-loss exits
• The value of managing trade size and consistent record keeping
• The process of putting together your own personal money management system

Unlike other books that focus on the complex mathematical theories behind money management, this book presents its system in straightforward, easy-to-understand terms that will allow you to quickly see how these concepts work and immediately benefit from the value of effectively managing risk.

Editorial Reviews

From the Inside Flap

Risk control tends to be the last thing that most traders focus on, perhaps because of the popular belief that it's their trading strategy that will generate great fortunes. But ultimately, a strategy alone won't create riches. A trader or investor needs to develop discipline, a strong financial psychology, and a sound money management system to maximize profits and keep them out of financial danger. In A Trader's Money Management System, veteran trader Bennett McDowell offers readers an expert guide to the most important elements of money management in trading.

McDowell shares his personal money management system, with the ultimate goal of helping you design your own system, customized to fit your risk tolerance, your experience level, and financial needs. He identifies the six types of risk to consider every time you make a trade—trade risk, market risk, margin risk, liquidity risk, overnight risk, and volatility risk—covering each in detail.

In easy-to-understand terms, the author then breaks down his system into five key elements. He first explains the psychology of risk control, telling what issues to look for and how to address them in order to more effectively implement your money management system. McDowell then details a variety of stop-loss approaches and gives you tips on how to make sure you adhere to them when they're hit. He follows with a discussion of trade size, showing how to determine how large or small your trade size should be so that you are not overextending your risk. McDowell then covers the crucial element of record keeping, and explains how it pays significant dividends. Finally, he shows how to design a realistic personal plan—one that you will continue to use and profit from.

This book also equips readers with two valuable tools: A one-month free trial of Trade Size Calculator software and The Trader's Assistant recordkeeping materials. The trial Trade Size Calculator software is downloadable at www.traderscoach.com (see Appendix A for details), and The Trader's Assistant recordkeeping materials can be photocopied directly from the book. These two tools complement the text and together provide a complete package that will deliver better results to your bottom line.

From the Back Cover

Praise for A Trader's Money Management System

"I am pleased to strongly recommend this excellent book, A Trader's Money Management System. If you are picking up this book, congratulations, since you have taken the first steps in following in the footsteps (by using proper money management) of successful traders."
—Steve Nison, President, Candlecharts.com, and author of Japanese Candlestick Charting Techniques

"Bennett McDowell demystifies money management for traders in his new book. With these simple, time-tested strategies, a trader will decrease the time it will take to become profitable."
—Adrienne Toghraie, President, TradingOnTarget.com

"Bennett McDowell does traders a HUGE favor in this valuable book by emphasizing the extreme importance of risk control and its vital place in a sound trading plan. Further, he provides knowledge of and access to specific tools, which enable the trader to implement his ideas simply and effectively. His simple straightforward treatment of a complex and often boring subject is a breath of fresh air and a worthwhilecontribution to this important element so crucial to the achievement of successful trading results."
—Edward D. Dobson, President, Traders Press Inc.

The best-kept secret to trading success: money management

Money management may very well be the most important piece of the trading puzzle. In A Trader's Money Management System, expert Bennett McDowell provides time-tested techniques that can turn a losing trader into a winning one—and take the winning trader to an entirely new level. In revealing his personal approach to staying out of trouble in the financial markets and maximizing profits, he offers comprehensive insights into:

• The psychology of risk control as well as the finer aspects of setting stop-loss exits

• The value of managing trade size and consistent record keeping

• The process of putting together your own personal money management system

Unlike other books that focus on the complex mathematical theories behind money management, this book presents its system in straightforward, easy-to-understand terms that will allow you to quickly see how these concepts work—and immediately benefit from the value of effectively managing risk.

See all Editorial Reviews

Product Details

• Hardcover: 210 pages
• Publisher: Wiley; 1 edition (July 8, 2008)
• Language: English
• ISBN-10: 0470187719
• ISBN-13: 978-0470187715
• Product Dimensions: 9.1 x 6.3 x 0.9 inches
• Shipping Weight: 10.4 ounces (View shipping rates and policies)
• Average Customer Review: 4.2 out of 5 stars  See all reviews (87 customer reviews)
• Amazon Best Sellers Rank: #163,163 in Books (See Top 100 in Books)
  • #30 in Books > Business & Investing > Industries & Professions > Insurance > Risk Management

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Customer Reviews

Most Helpful Customer Reviews

56 of 66 people found the following review helpful:

5.0 out of 5 stars Author's Response To John T. Morris, July 24, 2008

By 

Bennett McDowell, TradersCoach.com (San Diego, CA USA) - See all my reviews

This review is from: A Trader's Money Management System: How to Ensure Profit and Avoid the Risk of Ruin (Wiley Trading) (Hardcover)

Thank you to John T. Morris for buying "A Trader's Money Management System" book and for reading it. And, though his review was less than glowing, I appreciate his comments here on Amazon.com because it opens up a valuable dialogue for traders about "effective" money management.

In response to his comments, let's just say I'm the first to admire the work of Douglas, Elder and Tharp -- and encourage anyone not familiar with their work to study them. My concern for Morris is that he makes no mention of Nauzer Balsara or Ralph Vince -- arguably the two greatest mathematicians in the field of trading. These men are mentioned in my book because their timeless concepts (both wrote books over 15 years ago) are the basis for truly "effective" money management.

With that said, many will agree that Balsara and Vince, while they are pure genius, can be at times difficult to comprehend for the new trader -- and even for some very seasoned traders. What "A Trader's Money Management System" does for the reader, is to make some of these complex concepts -- like using the risk-of-ruin tables and optimal f formulas -- easy to understand and instantly implement.

Apparently my simplicity in the book has worked since Morris says in his review that "...I do give this book two stars rather than one because it does contain some ideas that I have never run across before in my study of trading: The Risk of Ruin concept plus optimal percentage formula to determine the amount of equity capital to be risked on any one trade...".

If he has gained that insight from the book, then he is one step closer to developing more "effective" money management. The next big step for him would be to realize that there is no "magic percent" to risk on each trade. The 2% figure is purely an example and a frame of reference for the reader and that is why there is an "Important Note" stated when ever the 2% figure is mentioned. The important note directs the reader to Chapter 9 so that they can use the risk of ruin tables and optimal f formulas to calculate the exact amount that should be risked on each trade.

When Morris states that "...except in very exceptional cases, 2% is way too much to risk on a trade and that it should be more like half at most..." he is not basing his analysis on any mathematical probabilities. Instead, it's more of a hunch, since he's taking numbers out of a hat from interviews in the Market Wizards book. He doesn't know what the pay off ratios or win ratios for the traders interviewed were.

By looking at page number 79 in "A Trader's Money Management System" you'll see that my recommendation for a trader producing a win ratio of 35% (meaning you are winning only 35% of your trades) and a payoff ratio of 2 to 1 (meaning for every dollar you lose you earn 2 dollars) -- they should be risking only 1% . Where as on the same page of the book you'll see that if you have a win ratio of 50% and a payoff ratio of 3 to 1 you would in fact be able to risk 10%.

Why can one trader risk only 1% and another risk as much as 10%? It is simple, from a mathematical probability, their historical performance warrants -- less risk -- OR -- more risk -- depending on how well they trade.

I've been working with traders for over ten years and have to say that my passion is trading and education. Hopefully this response to John T. Morris will give other traders, if not Morris himself, some insight into effective ways to structure their risk -- depending on what their current trading results are telling them through their win ratio and payoff ratio.

20 of 23 people found the following review helpful:

5.0 out of 5 stars Great Formulas And Record Keeping Forms, July 14, 2008

By 

Sea Shell Seeker "Sea Shell Seeker" (Amelia Island, Florida) - See all my reviews

This review is from: A Trader's Money Management System: How to Ensure Profit and Avoid the Risk of Ruin (Wiley Trading) (Hardcover)

This one's a brand new book to add to your collection of Ralph Vince and Nauzer Balsara. Difference, though, is that this book really simpllifies the essentials and makes it easy for even the beginner to understand the sometimes complex money management formulas that truly are essential to trading success. I've got the other books too -- but this is the one that helped me effectively and profitably implement the formulas to calculate what percent of risk to take on each of my trades so that I'm not risking too much (which has exposed me to risk of ruin in the past) and then again -- McDowell's formulas help me not risk too little so that I'm not maximizing my return. The formulas are all based on your performance statistics at any given moment (which will be different during drawdown VS a winning streak) and they are basic algebra -- so you don't need to be a mathematical expert to use them. The other really valuable tool that has helped me is the record keeping forms that come with the book. Now I'm caputuring the data I need on each transaction and my analysis gives me the answers I need.

22 of 26 people found the following review helpful:

2.0 out of 5 stars Skip this expensive appetizer and go straight for the main course, May 29, 2009

By 

demago (Singapore) - See all my reviews

This review is from: A Trader's Money Management System: How to Ensure Profit and Avoid the Risk of Ruin (Wiley Trading) (Hardcover)

I'm glad I checked out this book in the bookstore before buying it. I would be seriously pissed off paying so much for what is really just a sampler, just enough to whet the appetite. The bulk of the book is trading 101 on money management, and the little bit that goes beyond the basics is covered in much greater depth in the Vince or Balsara books. In itself there's nothing wrong with an intro book, but at this price it's just greedy. It just proves Elder true when he says that most of the money of the "losers" in trading doesn't go to the "winners" but to the trading industry. If you're serious about trading you're going to want to move on to the more meaty books anyway, so don't waste your money and go there straight away. So I'd say, read Balsara first (very readable) and then move on to Vince (quite a bit of algebra, but actually quite basic by quant standards -- anyone with good high school math and willing to make the cognitive effort will be OK).

Note also that most 4 and 5 star reviewers have only a track record of one review (or if it's two, it's to give rave reviews for the author's other book). What a coincidence, so many first-time reviewers.