Sorry but the system does not make the profits the MM does.
And I disagree that MM is solved easily. It's the hardest part of any system and it is the #1 reason traders fail.
A 70 or 80 or 90 % winning system does not equate to profits.
my view on this is that as stated, the edge is a very hard thing to grasp, even if discovered early on.... you dont really understand it until you UNDERSTAND IT.
now as far as the money management goes since that is your question.
in my opinion the $ risk should be directly dependent on the volatility in two major ways
1) statistical historical volatility
2) current volatility
to give you an example, the Euro/usd
2910 trading days (since inception) can be divided in to quartiles and the mean
minimum range of all time=0
25%< of the time it traded at a range of 77 pips
average= 121 pips
25%> 150 pips
maximum ever range= 546 pips
now establish what the volatility is for the past 24hrs as it is the most current reading.
0.9% volatility ([SD*2+SMA] - [SMA-SD*2])/ SMA , this is the easiest way to obtain a volatility otherwise you would have to obtain the log return, then the daily variance get the sqr of the average .... and so forth. (an even easier way is an hourly chart with a Bollinger Band at setting of 24,2... then you get (TOP BB-LOW BB)/MID BB
you might be wondering what this has to do with money management. Well the premise here is that a tight stop is susceptible to volatility therefore I personally like my stops away from normal volatility and the T/P within volatility but never <1:1 RR ratio.
now adjust your position size to not risk greater than EITHER of these two things
1) the statistical performance of your system if let say you have a 50:50 W/L method then risking 2% per trade would blow your account within normal performance of your system in place.
2) do not risk more than the average daily volatility of the pair in question, the reason for this is that if the euro has a normal 1% volatility and you are risking 2% of your account it is tremendously hard to get a return > than the volatility of the pair without over leveraging and becoming susceptible to the volatility at least in my opinion.
However I think you are still not sure on your edge, and if that is the case no amount of money management can save your account.
let's assume you have a random market, (that is a big assumption) then you can expect below open 50% of the time and above open 50% of the time as these are the only scenarios. Now being a random market a system that can give you a positive probability expectation will be in your favor.
but since it is not a random market entirely you have trends, you have clustering, you have kurtosis, heteroskedasticity, and skewness which messes with any rigid system in my opinion.
you have to have a sense of direction, because you are not expecting 50/50 you can have 30/70 or worse so at the end the money management will be a slow painful death by a thousand stops.
IF you have a profitable system then 5% is probably not too much from a mathematical perspective. But most traders could not live with having 50-70% drawdowns that a high risk% would entail. So they will try to limit drawdowns to 20% which generally means 1-2% risk at most.
The trade-off is between higher returns with high drawdowns and lower returns with lower drawdowns.
So to be clear - the reason to limit risk% to 2% is psychological not mathematical.
All this talk about "an average system". What does that even mean? Define Average. Does that mean if you picked ten systems on ForexFactory at random and picked one in the middle? Does it mean a system that generates an average return? Average return being if you added up the return of every trader in the world and divided the total by the number of traders?
You can't go throwing around the term "average system" when it doesn't really mean anything.
In my opinion the "system" or method of trading is the most important thing. You can't money manage your way into profit with a system that loses more money than it makes.
People rant on and on about money management. What's the big deal? Risk 1% to earn 2% if you're trading the hourly or higher. If you're scalping the M1 chart rish 1% to get 1% and have a high hit rate. There is nothing magical about money management. Just keep your risk low enough for your account to survive a string of losses. As a scalper I would NEVER risk 5% on any trade. I risk between 0.3% and 1% and that's all. If you're trading the daily or weekly, well you're going to have to risk more unless you have a huge account othrwise you're never going to make a living from it.
Ok, two things:
1) I wanted to chime in here and say the people who said 5% is too much are correct....but not quite because the risk is too high on its own; You are risking too much without having first established a 'system' expectancy.
By 'system' I mean your trade signals and rules. Not just money management, but what tells you to get in and what tells you to get out. If you can't define that down to a precise rule, you can't test your rules against market data, and you can't begin to judge what's appropriate money management given the expected outcome.
5% might very well be acceptable, should it fit into a system where there isn't a high chance of taking consecutive losses. (Though, I don't know of many that fit, I'm just speaking "theory trade here", for a practical number we'd be talking more in the 0.5%-2% range.)
2) If you're trading on our own discretion, that is, without a rule based system and more on what "looks/feels" good to you at the moment. I would first say that most new traders fail hard this way, but if you must learn this lesson then at least do yourself the favour of establishing at what price level you're clearly wrong and stick to it by setting a hard stop. Not just "because it hit my 5% equity drawdown"... but in what cases are you clearly wrong before you lose 5% (again, just using the % you gave, I personally think this number needs to be lower.)
For instance, if you enter a trade and it immediately moves against you hard, like, spiking price hard, is that something you expected to happen (obviously no, else you would have waited for the spike before entering) so right off the bat your interpretation of the market may be flawed and you should be looking for a way to get out cheaply in case the momentum continues. Minimizing losses (preserving capital) is paramount for professional traders.
Then, 5 or 6% risk is not too much (IMHO)
(and that's all it is; an opinion)
I'm a firm believer that if you wouldn't trade a $100k account with 5% risk then you have no business trading a $100 account with 5% risk. No one gets to trading large by building bad habits trading small.
What I know is what has worked best for me. It involves risking more than 1 or 2%. If I "think" I see a great trade I'll (as someone said) back the truck up.
Trading manually is really more about common sense than any system/method. We use a system to try and make some sense of it. Neither always prevails so it's a combination of system and common sense.
Again, just an opinion.
No worries Was just trying to be clear.
The very best of trading to you.
If I can suggest, why pushing your luck with that kind of choppy market? Why not choose clearer pairs such USD/JPY long or AUD/USD short, or may be if you already have deep understanding about market you can watch closely for long opportunity at EUR/AUD & GBP/AUD crosses. If you want to trade currency, understand their economic background first so you can sure your position will be backed up by large amount of trader out there
It's funny how people just interpret stuff into my posts. And MM is still the easiest part of the equation.
© Forex Factory