Portfolio Considerations of a Trading Strategy (Part 7)

I concluded the last post by claiming portfolio considerations are often overlooked because discussion of trading strategies is much “sexier.”

To evaluate this claim, I should first address whether it is even true. Ryan Jones writes in The Trading Game (1999):

> Money management is thought by many to rival only accounting in its boredom.

At least I am not the only one who perceives traders to preferentially enjoy discussion of other topics like trading strategy. Jones continues on to say money management is misunderstood. Money management is truly exciting.

In most contexts, “money management” can be substituted for what I have been calling “portfolio considerations.” Some believe that strategy (e.g. position setups, adjustment guidelines, and stop-losses) and money management (e.g. position sizing, portfolio risk management) are two different components of trading.

This traditional, almost intuitive division between trading strategy and money management enables commercial interests and fellow traders to focus on the former while overlooking the latter. While they may be separate, a successful business plan cannot exist without both!

Jones argues that $1,000,000 in profit may be generated using a conservative money management approach by earning $100,000 trading a single unit, contract, or option. This can be done in five years by:

–Making $20,000 profit per year
–Making $1,667 profit/month
–Making $384 profit/week
–Making $75 profit/day

What would it take to make seventy five bucks per day?

–Three ticks in the S&P 500
–Less than three ticks in bonds
–Seventy five cents on 100 shares
–Six pips in a currency market

None of these seem to be altogether too much, do they?

Ryan Jones has presented an example where “money management” is responsible for $900,000 of $1,000,000 total profit.

What is dull and boring about that?

Could the true power of money management just be misunderstood and/or unknown?