Money Management Model

In most books on trading you are told to let your profits run. This is only partially true and dangerous if you follow the advice blindly.

In any business, you do not have a profit until you cover your costs first. In trading, you costs include data services, commissions, computer software and your time. After you cover your trading costs, then you can think about profits. Then you can let your profits run.

The reason you must plan to cover costs first before letting profits run is markets tend to congest more than trend. If you buy a stock and the stock moves initially in your favor it will normally congest after a few days of trending. The congestion shows that supply and demand are in balance. At this point only two things can happen. The stock market can break up or down. If it goes up this is wonderful and you can advance your stop to breakeven level. If it breaks down, your small profit may become a loss. Even though you were correct in your analysis and entry into the stock market you received nothing for the risk you took.

This is a way to handle the second case and at least cover costs and make a small profit should the stock market reverse against your position. Professionals in the business call it as financing your trade.

If you have isolated a low risk entry such as a pivot, reversal bar and change swing, take a position multiples of 2 or 3 lots. Target a small profit on part of your position to pay for your costs and the risk you have taken. Take this small profit and use it to finance you protective stop. In this way should the stock market reverse you will at least get something for your risk. By financing your trade you will have mental peace. You will be in a win-win situation.

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