Sound money management is the most important aspect in successful trading! The best market analysis won't get a trader to the bottom line- consistent profits - unless he/she has a sound money-management policy. For this area of our analysis, we rely upon the general principles laid out by Amos Hostetter.

Mr. Hostetter is best known for his trading ventures, for the respected money management company Commodity Corporation, in the late 1960's and up until his untimely death in 1977. As a trader and money manager, Amos Hostetter drew little difference between trading principles and money management principles, as his philosophy could best be described by: The Market, to be commanded, must be obeyed!

His most important trading and money management principle was "Take care of your losses and the profits will take care of themselves." This means that traders should place an emphasis on keeping losses small, because two or three large successive losses can and will be a crippling blow, even to the most enthusiastic and well capitalized trader. Such bouts with "account death" are common for the trader who takes large risks frequently. Mr. Hostettler would adjust his position sizes in accordance with risk to reward ratios and absolute dollar risk, keeping his exposure to losses relatively small. Trades which require more than 25% of ones account to be at risk should be instantly vetoed, while Mr. Hostettler would routinely risk less than 10% of his account on any one position.

Position size is another ingredient in the decision making process. Mr. Hostetter would adjust his position size according to his recent trading performance. When he was personally out of line with the markets (which was rumored to be very rare), he would scale back his positions, often going weeks with out anything more than a token position in the markets. Sometimes this may have been the result of a lack of worth while opportunities, but on occasions this also had to be due to personal disappointment with his own recent performance.

Above and beyond everything else, Mr. Hostetter had a great deal of self-awareness and self discipline. Good money management means that one does not blame the market for ones own lack of acceptable results- profits- it means having the intestinal fortitude to only risk a certain percent of your funds on any trading opportunity, knowing that one has to survive adversity to prosper. Long periods of inactivity or lighter positions after a string of losing positions can be difficult, but having a sound trading plan, coupled with risk management should give the trader the self confidence to weather these trying times. It is the job of the trader to control himself and his personal demons, knowing that each position entered has risk potential and profit potential, and only time will tell how this particular works out. If the trader can "Take care of their losses and let the profits take care of themselves", then he/she should be able to trade with the confidence that each trade is only a small part of the over all operation of his or her personal trading.

Very rarely does one trade make or break a career in trading. Mr. Hostetters carreer was not defined by one great trade, but a series on trades, which when added up after the winning and losses accounted for, showed a substantial profit. It is the string of trades which sets the tone and determines profitability. Though one "bad" trade without practicing prudent money management can destroy an account, it is usually ones complacent attitude about risk, which accounts for so many fortunes being lost in the commodities markets.

Though practicing the above will not guarantee you being a profitable trader, the lack of applying sound money management will almost assuredly place you in the unprofitable category. Risk should be assessed before a position is placed. If the potential risk, as defined by the stop loss point, is greater than a maximum of 25% of the cash value (not including open position profits, but including open position losses), then the trade should not be placed. More stringent rules are recommended, with many successful money managers risking less than 1% of their available capital on any one trade, but we realize this is beyond the capacity of most retail, non-professional traders.

The last point about money management is that Futures and Options speculation involves a great deal of RISK! Only capital you can afford to lose should be used. If you are risking your mortgage money in the markets, your retirement funds, or your children's college funds, then you have no business speculating! If you use non risk capital, you will not be able to speculate effectively, as fear and greed will always over rule your rational thinking. The market, your broker, and even the National Futures Association can not make the decision for you if the money you have available is risk capital, you have too. As a general rule, risk capital is loosely defined as money which if lost will not effect your lifestyle. If however, you are risking money you can not afford to lose, you will surely do just that, as the emotions involved will be too high, allowing you to fall victim to the whims of the market-place.

Another very minor form of risk management is in choosing your broker. Be sure to check with the National Futures Association (www.nfa.futures.org) before considering doing business with any broker or brokerage firm. Only deal with registered individuals and firms, as many an investment swindle could have been avoided if the people would have only bothered to check with regulators before "investing." You broker should also not make wild, pie in the sky promises, but should spell out the risks involved in the highly leverage field of commodity futures and options.

Another risk involved in trading is what is called "slippage". A stop loss is always recommended, but be aware that over-night movement, fast market conditions, and the general nature of the commodity markets will often cause your stop loss orders to be executed at prices which can very greatly from your predetermined risk. Personally this is why I think they call the filling of an order an "execution", as this is what it can do to your account. Keep this in mind, and always a lot some extra money to your trading plan in risk for this. Generally your orders should be filled near your stop loss (usually with in 4 ticks), but "slippage" can and will negatively effect your performance, and as a speculator you just have to live with it.

Before entering using any form of commodity analysis, be sure to read the National Futures Association Hypothetical Risk Disclosure as well as their general risk 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 IN 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 OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.