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2024/05
Get ahead with fund management plans from trading experts
American short-term trading master Larry Williams once said, “Even with poor techniques, you can survive in the market if you understand fund management. Without fund management, even the best techniques will eventually be eliminated by the market.”
In trading, achieving consistent profits is about seeking steady growth of principal. Many traders with extensive experience and skilled techniques have made significant profits but have disappeared due to the pitfalls of poor fund management. So, what constitutes effective fund management?
1. The Importance of Fund Management
Fund management is often the key determinant of trading success or failure and the critical factor distinguishing winners from losers. Whether you are a short-term trader or a long-term investor, even the best trading system in the world will only save you if you know how to manage your funds. A trading system’s ability to make money may impress you, but fund management prevents bankruptcy and makes you a true winner.
Many traders need a fund management plan, and even those with one might need to learn how to follow it, making it hard to make significant money in the market. They often rely on market luck; while they may occasionally make money, excessive risk-taking or adverse conditions can quickly wipe them out.
Conversely, even if a trading system could be more sophisticated, mastering fund management techniques can still keep you in the winning bracket. In other words, almost any reasonable trading system can succeed with a sound fund management plan.
By appropriately managing risk, even the most straightforward system can achieve desirable performance. Without fund management capabilities, the trading journey becomes much more difficult.
2. Fund Management Plans from Top Trading Experts
Most recognized trading experts strictly adhere to their fund management models or tools. Analyzing these models reveals that their fund management strategies revolve around three key considerations:
- Diversification and allocation
- Position sizing
- Timing of entry and exit.
Below are the fund management plans of several top traders, providing further insights into the secrets of their trading success.
a. Richard Dennis, Founder of the Turtle Trading Rules
Position Sizing: Each position should equal 1% of your total capital; total positions should not exceed 12% of your total capital.
Diversification: Single commodity positions should not exceed 4% of your total capital; highly correlated products should not exceed 6% of your total capital.
Entry/Exit: Use the 20-day moving average for buy/sell decisions.
b. Bruce Kovner, a Major Currency and Futures Trader in the 1980s
Position Sizing: No more than 5% of total capital should be used in any single trade.
Diversification: Perform daily computer analysis to minimize the correlation of each trade.
Entry/Exit: Add positions when the price reaches a certain level and then falls back to a specific price. Keep losses on any trade within 1-2% of capital.
c. Monroe Trout, New Financial Wizard
Position Sizing: At the beginning of each month, set the maximum trading volume for each market or commodity. No matter the market condition, trading within the month should not exceed this limit.
Exit Strategy: Close positions if a trade loses 1.5% of total assets; halt all trading if total assets drop by 4% in one day; if monthly losses exceed 10%, close all positions and resume trading the next month.
In summary, even top trading experts follow fund management methods focusing on these points:
- Limit capital investment to a certain percentage of total capital (light positions).
- Control the size of investments in any single market (diversified investments).
- Limit losses on individual trades (e.g., to 5% of total capital).
- Add to positions following trends.
- Effective fund management is fundamentally about risk control.
3. Risk Control: The Core of Fund Management
The importance of fund management lies not in “making you money” but in “keeping you alive.” It is a lifeline, not a ladder to the top. In the trading world, longevity grants you a voice. As a trader, you must believe in your ability to seize profitable opportunities, yet only a small percentage achieve overall capital growth.
Institutional data on currency traders from 2018 shows that only 39% made a net profit, while 61% incurred losses. Successful traders typically exhibit these characteristics:
- Non-Essential Investment Funds:Investment funds should be optional for your survival. Generally, people invest at most 25% of their assets, ensuring that losses do not affect their daily lives. This is the first step in fund management.
- Maximizing Gains with Clear Trends:Be bold in increasing positions when trends are clear, but consider the adverse effects of sudden reversals on total funds without violating basic fund management principles.
- Preemptive Risk Control:Conduct risk assessments on trading funds to ensure sufficient remaining capital in the account to continue normal trading.
