Risk Management and Money Management for the Intermarket Trader

John Murphy's intermarket analysis provides a effective framework for identifying high-probability trading opportunities. However, even the best trading system will fail without proper risk management and money management. In this article, we will discuss how to apply these essential principles to an intermarket trading strategy.

The Importance of a Trading Plan

Before you ever place a trade, you need to have a written trading plan. Your trading plan should outline your trading strategy, your risk management rules, and your money management rules. A trading plan will help you to trade with discipline and to avoid making emotional decisions.

Setting a Stop-Loss on Every Trade

A stop-loss order is an order to sell a security when it reaches a certain price. A stop-loss order is your primary tool for managing risk. It is essential to set a stop-loss order on every trade. The placement of your stop-loss order should be based on technical analysis. For example, you might place your stop-loss order below a key support level.

Risking Only a Small Percentage of Your Capital

It is essential to risk only a small percentage of your trading capital on any single trade. A common rule of thumb is to risk no more than 1% or 2% of your capital on any single trade. This will ensure that you can survive a string of losing trades without blowing up your account.

The Importance of Position Sizing

Position sizing is the process of determining how many shares or contracts to trade. Your position size should be based on your stop-loss distance and your risk tolerance. For example, if you are willing to risk $100 on a trade and your stop-loss is $1 away from your entry price, you would trade 100 shares.

Having a Plan for Taking Profits

It is just as important to have a plan for taking profits as it is to have a plan for cutting losses. There are many different ways to take profits. You could use a trailing stop, a price target, or a time-based exit. The important thing is to have a plan and to stick to it.

The Psychology of Risk Management

Risk management is not just a mechanical process; it is also a psychological one. It is essential to have the discipline to follow your risk management rules, even when it is difficult to do so. This means cutting your losses quickly and not letting a small loss turn into a big one.

By combining the power of intermarket analysis with sound risk management and money management, traders can significantly improve their odds of success in the market. Remember, the goal is not to be right on every trade; the goal is to make more money on your winning trades than you lose on your losing trades.