Money Management Strategies for Futures Traders

By Nauzer J. Balsara

Overview

Published by Wiley, this book provides a systematic treatment of money management principles for futures traders. Written by Nauzer J. Balsara, a professor at Northeastern Illinois University, the book fills a critical gap in the trading literature by focusing specifically on the money management decisions that determine long-term survival and profitability in leveraged futures markets.

Key Themes and Arguments

The Money Management Process

Balsara defines money management as a multi-step process encompassing: ranking of available trading opportunities, controlling overall portfolio exposure, allocating risk capital across positions, assessing maximum permissible loss per trade, and determining the number of contracts to trade. He introduces the "risk equation" framework that links these decisions into a coherent system.

The Dynamics of Ruin

A foundational chapter derives the mathematical probability of ruin for a trading system with given win rate, average win/loss ratio, and position sizing. Through both analytical formulas and Monte Carlo simulation, Balsara demonstrates how seemingly profitable trading systems can lead to ruin when combined with excessive position sizing.

Risk and Reward Estimation

The book provides detailed methods for estimating risk and reward from chart patterns including head-and-shoulders formations, double tops and bottoms, triangles, flags, and wedges. For each pattern, Balsara specifies measurement rules for price targets and logical stop-loss placements.

Portfolio Diversification

Balsara applies Modern Portfolio Theory to futures trading, demonstrating how correlation analysis between commodities can be used to construct diversified portfolios that reduce overall risk. He provides correlation matrices for 24 major commodity markets and discusses the limits of diversification in highly correlated environments.

Position Sizing

The book covers equal-dollar exposure, fixed-fraction methods, and the modified Kelly system for determining optimal position sizes. Balsara shows how the Kelly criterion can be adapted for futures trading where the payoff distribution is continuous rather than binary, and discusses the practical considerations of fractional Kelly betting.

Managing Unrealized Profits and Losses

Detailed chapters address stop-loss methodology including visual stops, volatility-based stops, time stops, and dollar-value stops. The analysis of opening price behavior provides insights into setting protective stops based on the typical intraday price patterns of different commodities.

Significance

This book remains one of the most rigorous treatments of money management for leveraged trading. Its mathematical approach to position sizing and risk of ruin provides essential knowledge for any futures trader seeking long-term survival in highly leveraged markets.