Some General Money Management Guidelines

The following are some general guidelines that can be helpful in allocating one’s funds and in determining the size of one’s trading commitments. These guidelines refer primarily to futures trading.

1. Total invested funds should be limited to 50% of total capital. This means that at any one time, no more than half of the trader’s capital should be committed to the markets. The other half acts as a reserve during periods of adversity and drawdown.

2. Total commitment in any one market should be limited to 10-15% of total equity. This should prevent the trader from placing too much capital in any one trade.

3. The total amount risked in any one market should be limited to 5% of total equity. This 5% refers to how much the trader is willing to lose if the trade doesn’t work. This is an important consideration in deciding how many contracts to trade and how far away a protective stop should be placed.

4. Total margin in any market group should be limited to 20-25% of total equity. The purpose of this criteria is to protect against getting too heavily involved in any one market group. Markets within groups tend to move together. Putting on full positions in each market in the same group would frustrate the principle of diversification.