The art and science of money management

Um, so listen, this lesson's about money management, which I don't think is spoken enough about 'cause everyone wants the new opportunity, what's the best chart? But like I said, it starts with position size, and then if you have several names on all at the same time, you have to be considered with what we call portfolio heat.

Now, this is, um, the concept of...

Oh, let me take a step back.

When, when you put a position on, right, you have your, your position size, you have your entry, and then you have your exit, your protective stop.

And so then the distance between those two plate, those two prices multiplied by your position is what you have at risk.

Now, if you multiply that across the two, three, or four names that you have on, we would call all of that your portfolio heat.

So if you're risking 1% for every trade that you have on, you have four trades on, your portfolio heat's 4%.

Which means, again, you get to temper and set the thermostat for how much risk you can take.

Now, I might have that much risk on, but the 4% would have already come from gains that I already have that are unrealized in the marketplace.

I don't wanna be risking so much of my corpus, right? The initial amount of money that I would be putting into the account, my starting balance.

So if I put in 50K, say, for example, into an account, and I, I was drawing it down to, say, 47K, I'd be very, very...

I'd be moving around with a lot of trepidation and smaller position sizes to kinda trade my way out of the drawdown.

Now, if that goes to, say, 55, maybe 60K, now it's a little different because I have 10,000 of money that I've already earned that I would take that money and kinda reinvest it into m- into the positions.

Eventually, I might get much larger as those positions start to move in my favor, but I'm always aware of what the overall portfolio heat is.

So if I get to 60K, I might have three, 4% on, who knows what it is, of that 60K.

So I know, like, what is-- Okay, if I get knocked out on all of them, what's the worst-case scenario? Think about that number.

Obviously, it's aggravating, it might be frustrating, but can I live with it? Because at, y- you know, when you think, when you think about running money, this is gonna happen to you.

You're gonna have these types of moments where, unfortunately, the market's gonna move against you from time to time, and sometimes correlations go to one, or they get very close to one another.

If you might have, say, you know, NVIDIA, Intel, or Micron, or AMD, right? The whole sector can move against you for any one particular reason, and that could make you feel dishappy.

[chuckles] So, so think about when you, when it's not just on a per possession basis, think about the money management rules that you'll deploy.

I tend to not try to cherry-pick things and say, like, "Okay, I'm gonna have this stop here, and I'm gonna have that stop that's gonna be different and have varying amounts of money at risk across the positions." I try to tend to be very consistent.

As I mentioned earlier in the week, I vacillate between what is, like, a percent-based risk and then also one that might be based on structure, even though the amount of money at risk is the same.

Sometimes there is no structure, so I'd rather go with a bigger position and use a percent-based stop rather than say, "Okay, well, the structure support is, is, is more than one, one ATR, for example, away," which would induce you to have to trade a smaller position.

Normally, I would just trade the bigger piece and use an ATR stop and deal with the frustration or the aggravation of getting knocked out of something, but it's still defined.

So you can do both.