Why in the world do I want to persuade sane, intelligent readers to willingly spend a few hours learning about a subject that is believed to rival accounting in boredom? Why? Because money management is misunderstood-it is far from boring; it truly is exciting. No other knowledge in the whole realm of trading or investing can ignite an account faster than money management. Look at the following numbers and judge for yourself.

A common goal among many traders is to achieve $1 million in trading profits in their lifetime. It is a dream that most traders do not expect to actualize in less than 20 years (unless they are beginners, who think they can reach $1 million in trading profits in a little over an hour). However, the following numbers are what you need to achieve $1 million in profits with the help of the money management techniques. These numbers are based on a conservative money management approach (as opposed to aggressive).

That’s right, you don’t need $1 million to achieve $1 million. You only need to build profits that total $100,000 based on trading a set number of stocks or a single unit, contract, or option. What this means is that a person who trades a single contract, option, or set number of shares of stock and makes $100,000 at the end of five years, instead could make $1 million by implementing proper money management or increasing the risk on each trade. We can break this down into a five-year achievement goal:

1. $100,000 in profits during the next five years.
2. $20,000 profits per year for the next five years.
3. $1,667 profits per month for the next 60 months.
4. $384 profits per week for the next 260 weeks .
5. $75 per day on average for the next 1,320 trading days.

This amounts to 3 ticks per day in the Standard & Poor’s (S&P) Index, or less than 3 ticks per day in bonds, or $% in stock trading 100 lots per day, or 6 ticks per day in a currency market, or 2 ticks per day in the coffee market. You get the picture.

For those who trade a basket of currency markets such as Swiss franc, Deutsche mark, Japanese yen, British pound (SF, DM, JY, BP):

1. $20,000 per year in profits for five years.
2. $5,000 per market per year for the next five years.
3. $416 per market per month for the next 60 months.
4. $96 per market per week for the next 260 weeks.

This comes to a little over 1.5 ticks per day per market. For those who are well diversified across 10 markets:

1. $20,000 per year in profits for the next five years.
2. $1,667 per month in profits for the next 60 months.
3. $167 per market per month trading 10 markets.
4. Less than $40 per week per market.

Because we are dealing with math, the power of this type of money management is not limited to just futures and options. To accomplish the same goal trading 10 stocks of 100 lots each:

1. $100,000 in profits over a five-year period.
2. $20,000 each year for the next five years.
3. $0.37 per stock, per week.
4. $375 per week total from trading 100 lots.

Why is money management important? Because it can take an average or even less than average five-year return and produce more than enough profits to retire during that five years. Money management takes the trader past the point of no return. A trader who makes $40,000 over the next two years and then loses the $40,000 during the following two years has a return of $0 (zero dollars) after four years of trading. Had the trader used proper money management, the $40,000 could have grown to $200,000 at the end of two years. Then, when the large losing period came, as much as $100,000 could have been protected. After the trader made it to $200,000, the account was in a position to withstand just about any size drawdown (as long as the trader applied money management) without going back down to zero. That is an account that is to the point of no return. The trader applying proper money management is up $100,000, whereas the trader not applying proper money management
is at $0.

Why money management? Because it is responsible for 90 percent of the $1 million in profits shown in the preceding five-year illustration. It isn’t the system, it isn’t the market being traded, it isn’t the alignment of the moon and stars, it is sound, mathematically proven, money management techniques. That’s why.

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