Free Futures Trading Course – Page 6

Journaling & Stats – Money Management

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Journaling and Tracking Stats

One thing I started doing about a year into trading was journalling. Don’t worry, it’s not a “dear diary” exercise. Journaling can be what you want it to be but at a minimum it’s taking all your trades and analyzing the stats. There’s plenty of journal software out there, most of it online based. You either link them directly to your trading platform so they automatically grab each trade, or at the end of the day you download your transaction history, upload it to your journaling software, and there you go.

So for myself, I’m mainly using journaling for statistical analysis. I used to try do write notes about each trade, but realized quickly I never go back and read the notes, so I stopped. But what I did do was analyze my stats like a maniac. Each week I’d pour over the stats. What’s my win/loss rate? What is my MFE and MAE? Average time in a trade? The list goes on. Beyond that, once you get a few weeks of stats, now you can start looking at trends. Are you getting better at aspects of trading? How did this week do compared to last week?

Beyond just looking at stats, using them is whats the most important. I personally pick 1 or 2 stats and work on improving those until i do. When my win/loss/break even percentages were about 60-35-5, my goal was to get my win rate up to 65% and my break even to 10%. That leaves 25% for losing trades. Those small changes add up big in the long run.

Also, MAE (maximum adverse excursion) is a number that tells you what is the average amount a trade went against you. If I set my stop at 3 ticks always, and I never exit a losing trade until it hits that stop, my average MAE will be 3 ticks. But if I get out of some of those trades sooner, my MAE would be less, maybe 2.5. Keeping your MAE under control is important.

That’s an aside from journaling and stats, but it’s a great example of how to take journaling and stats a step further. Use the information to make changes and look for improvements. The numbers don’t lie.

Journaling software isn’t much. For about $30 USD a month you can have access to pretty much all the platforms out there. If you want recommendations, I personally use Journalytix , which is a great web based platform.

Money Management

Per Trade Money Management

There’s lots of advice out there on how a futures trader should manage their capital.

The common theme is you should never risk more than a set percentage of your capital on any one trade. I’ve heard anywhere from 1% to 5%. So for example, if you had $10,000 in an account, and you were willing to risk 5%, you wouldn’t put more than $500 at risk in any given trade.

This ties into how many contracts you trade. If you trade 1 UB contract, it’s $31.25 per tick profit or loss. You could sustain a 16 tick losing trade before you hit this. Now, I definitely don’t recommend having a 16 tick stop loss. You were wrong at a 3 tick losers, 16 is ridiculous.

How about 3 contracts? $93.75 per tick now (3 x $31.25) and all it takes is just over 5 ticks and you hit your $500 loss. Not as much wiggle room, still a bigger loser than I would advocate sitting through. Obviously this only grows, but if you were to trade 10 contracts, basically anything over a 1 tick loss is more than you should have risked. So with that range in mind, you have to decide what’s is a stop you are comfortable with (3 ticks for example), and if you are truly okay with a $500 per trade at risk, you could in theory trade 5 lots (5 lots X $31.25 x 3 tick stop loss) = $468.75.

I don’t necessarily endorse this specific trade, it’s more an example of the math you should run yourself through. Honestly I don’t love the above, it’s not how I would go about picking sizing and risk. Risking 5% gives you 20 trades before you are broke. Not to mention there comes a point where you don’t have enough margin to be trading 5 contracts.

I think this is a shift in how mosts newer traders perceive how trading works. They think you go in guns blazing, put all your capital into each trade, and turn that $10,000 into $1,000 profit each trade. It isn’t the reality. Sure you might hit a nice winner, but when you hit a fast moving loser and it spikes 3 ticks against you and you are down $500 almost immediately it will mess with your head.

Ultimately, I’m not going to tell you the specific percentage you should risk. It’s up to you, it’s your money. I will tell you though the more you put into each trade, the more risk and reward you expose yourself to. Putting a full $10,000 into 1 trade is making your decisions and profits very binary. You will either win big or lose big on 1 trade.

You need to factor in the product you trade, what that per-tick profit/loss is, what sort of movement your product does (fast moving, slow moving) and what it is currently doing. The Ultra Bond can sit in a 3 tick range for hours in the evening. It can spike 3 ticks in a second in the morning session. Timing matters.

Trading is a long term endeavour. A marathon not a race as the old saying goes. It’s slow growth at first. Take the time to just trade the 1 contract, and stick to a low amount at risk. Master the craft, the money will come with time.

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Daily Stop Loss Money Management

The second part to money management that is very important is having your own daily stop loss. The most you are willing to risk in a given day. Instead of just thinking on a per trade basis, how much are you willing to lose on a given day. Mine, I have it set at $300. Doesn’t sound like much, but guess what this does a few things.

I should mention first I have this set with my brokerage. It’s not a number I can just adjust during the day. If I lose more than $300, I’m locked out of my account until the next day. And they won’t just adjust it for you if you call. You are agreeing that the amount you set with them is your hard stop. You can change it for the next day, but not the day of.

Knowing this, I am very, very careful of my trades. I don’t want to get stopped out for the day. Do you really think I want to hit the first trade hard, go in 5 lots ($156.25 a tick) and potentially in a 2 tick loser just be done for the day? No way.

So this circles back to the first part and choosing your risk on a per trade basis. Your per-trade has to be in line with your daily stop also. There’s no sense in having a $500 per trade risk if my daily stop loss is $300. Remember, I didn’t say I do personally have a $500 per trade risk, that was just an example. I do though have a $300 per day stop with my broker.

Based on that what sort of contract sizing do you think I would chose to start the day?

1 lot. $31.25 per tick per trade. And a 3 tick stop. My risk per trade is $93.75, round it up to $100 for ease. That gives me 3 losing trades before I’m pretty close to my daily lock out. And I’m fine with that. If I take 3 losers in a row, I’m not doing something right, and it’s maybe best I step away for the day. And that’s okay.

So how do I ever size up? Well, we’ve been focusing on the down side. Let’s talk about the up side.

While my daily stop is $300, I also set a threshold that once I’m above it, I won’t let my profit fall below. A trailing stop if you will. Now unfortunately I can’t set this with my broker, so I do have to manually enforce this on myself.

So for example, say I’m up $500 in profit, I won’t let myself fall below $200 in profit. If I take on enough losing trades that I eat up my $500 in profit down to $200, walk away. Simple. Shut down the computer, done for the day. It’s a profitable day, I made $200. I can go to bed knowing I made money trading that day.

Now as profits go up, this is when I start getting more adventurous with adding on size. Say I’m up $1,000. I can decide what’s an amount I’m okay with walking away from the computer with. $700? $500? $200 still?

It varies day to day. If there’s lots of trading to be had that day, I want to be in the market. If it’s been a slow day and I’m lucky to be up $1,000 maybe I just call it quits right then. Context is key, not just in trades but in trading.

So I’m up $1,000, maybe now I trade 2 lots, or 3 lots. But what is important is I have a number set that I won’t fall below, and I know what that means in terms of ticks. If I’m up $1,000, and I’ve decided I won’t fall below $500 in profit for the day and I’m okay with that, well that gives me $500 to risk. What is that in terms of ticks trading 3 lots? Basically 5 ticks. I could take a 3 tick loser and a 2 tick loser. Or 1 big 5 tick loser. But point is, I know what these numbers are. I’m not just jumping in. Have the parameters and rules set in advance.

Short Version of Money Management

I know the above is a lot of deciding what works best for you and numbers. So here’s the very short version:

  • Pick a daily stop loss and I recommend setting it with your broker so you can’t violate your own rule
  • Pick a per-trade risk amount you are comfortable with, and tie this back to how many contracts you can trade comfortably
  • Never, never, let a winning day become a losing day – once you are profitable, set a minimum amount of profit at which you will walk away for the day if you hit
    • Example: You are up $500 for the day, if you fall to $200 profit you are done. It is still a winning day.
  • Increase your size when you’ve made money to do so with. Up $1,000? Great trade 2 or 3 contracts instead of 1 if you want. But still maintain that minimum profit level where you are done for the day. Consider it your own self imposed trailing draw down.

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Risk Disclosure:

Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: 

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight.

In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

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