Ecclesiastes 4:9-10 Diversification is a way to deal with this potential for failure. You divide the risk so that if one investment fails, the possibility exists for another one to pick up the slack or at least ease the blow. In the arena of speculative trading whether that be in options, futures, commodities, or stocks, the same principle applies, if not more so. There are brokerage firms out there that will sell a novice trader on one market or another for one reason or another. Heating oil is one of the more popular markets that brokers push during the early fall. The argument is that winter is coming and the demand for heating oil should rise. As the demand for the market rises, so will the price. Because it is a logical, sound argument, people buy the pitch and then end up buying the market. Most brokerages that sell this pitch do so 118 i ; ; I ! 1

TRADING A PORTFOLIO WITHOUT MONEY MANAGEMENT through options. That way, if for some reason or another, the market moves against the position, the traders losses are limited to the purchase price of the option. Since the argument is so logical and the risks are absolutely limited, some will open up accounts for $10,000, $50,000, even $lOO,OOO+ and buy as many of those options as that money will buy. They are gambling. Not trading a portfolio when it is affordable is nothing but gambling. Some have lost the entire value of their account because the market went against them (and because they didnt implement any money management principles).

In this chapter, we analyze the benefits of creating portfolios in two situations: trading without money management and trading with the Fixed Ratio money management method. Both examples use leveraged instruments. The benefits of trading a portfolio as opposed to a single market or system without application of any money management actually enhance the effects of applying the money management to the portfolio. Market weighting, as discussed in Chapter 9, is a popular strategy with many traders. However, this chapter demonstrates that for the most part, they should not make it a common practice.

TRADING A PORTFOLIO WITHOUT MONEY MANAGEMENT Reinvestment strategies aside, portfolios are extremely beneficial for several reasons. As already mentioned, the first and most obvious is reduction in risk. A primary goal in creating a portfolio is to be able to stay in the game should one or more of the trading vehicles not perform as expected. Not putting all the available risk capital in one market automatically extends the staying power of any trader. Another goal and benefit of trading multiple markets and/or systems is that it is likely to improve the risk/reward ratio.