Your third step is to define yourself as a trader. This is a critical step and one most traders accomplish only by default. You will save a great deal of time and avoid much frustration by working through this process as early as possible in your trading career. Too many traders overemphasize the specific tools needed for trading and fail to apply the “know thyself” rule as traders.
What markets do you like to trade? Probably the ones in which you enjoy the greatest success. Analyze those for the characteristics that make them work, and stick to markets with those characteristics. What are your personality traits as they relate to trading? Are you a calm or nervous sort of person, for example? Are you conservative or aggressive?
What are your financial means and goals? Will you be trading an account of $3,000 or $30,000? How much are you really comfortable risking in toto and on any specific trade? What money management ideas are best for you and for the tools in your codex? Are your selections realistic, and do they complement each other? Money management is not about how much money you can make. It’s about avoiding losses. If you stay in the game long enough, you will make money. But if you lose your grubstake, you will not be in the game for that big payoff day.
My mentor, Charles B. Goodman, emphasized this over and over to me. I call it the Belgian Dentist approach. In Europe, Belgian dentists are considered the most conservative of traders. Trade the long term to break even; always consider risk above reward. I know, that doesn’t sound very sexy. But if you break even over and over again, you will eventually win.
The primary money management parameters for all traders are the following:
- Aggregate account drawdown or risk.
- Win-to-loss percentage for specific trades.
- Aggregate percentage of wins to losses.
Different traders will modulate these parameters in different proportions, but it is important to set your standards up front, be realistic about them, and confirm that they are in agreement with the rest of your codex.
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