SYSTEM MANAGEMENT
Preparing For (Market) Battle
Building A Trading Template
by Giorgos E. Siligardos, PhD
A template makes things so much easier for so many things,
trading included. What should you build into yours to manage your trading?
Proper trade management and money management
are a must for all types of market participants. Even though there are
many trading-related software packages, few, if any, provide a template
for monitoring trades based on trade management (TM) and money management
(MM) rules not related to mechanical trading methods. In this article I
will discuss the main parts of such a template that can be implemented
in Microsoft Excel and applied to mechanical and proprietary trading.
DEFINING SYSTEM MANAGEMENT
Money management and trade management are terms that are often misrepresented.
This is because they are unrelated to entry setups but instead are related
to the risk associated with the trade. Traders usually refer to position
sizing when it comes to money management. But whatever term you use, there
are differences between money management and trade management.
Money management refers to the calculation of the size of a trade and
the loss allowed if the trade does not perform well. Trade management refers
to methods and manipulations before and after a position has been opened.
This is to make sure you are protected from undesirable movements of the
tradable and simultaneously guarantee that if the position ended up in
your favor, the profit will compensate the risk taken. Determining the
money you are willing to put in a trade and the risk you have accepted
to take by defining a stop-loss are money management concepts.
But the process of evaluating the status of the trade as it evolves
(that is, evaluating whether it merits being in the trade based on a set
of predefined rules) and determining possible exit levels falls into trade
management. Determining trailing stops originates from money management
rules and is accomplished through trade management. I refer to the template
in this article as "system management template" (SMT) because it implements
both TM and MM concepts. It can be applied to all trading systems, mechanical
or not. The SMT is inspired by the turtle trading system.
...Continued in the August issue of Technical Analysis of STOCKS
& COMMODITIES
Excerpted from an article originally published in the August 2007
issue of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2007, Technical Analysis, Inc.
Return to August 2007 Contents
