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Money Management Percent?

  • Post #1
  • Quote
  • First Post: Jan 12, 2007 11:55pm Jan 12, 2007 11:55pm
I hear of money management in almost every post. I posted this as kind of a survey to determine how people determine proper money managment.

Say you have a 10k account and you want to risk 10%. 10% of $10000 is naturally $1000. My question is do the majority of traders......

A: Place a number of positions equal to $1000. So when you SL is hit your loss is actually greater than the risk percentage.

or

B: Take the risk amount, in this case $1000, divide by number of pips when stop loss is hit to determine the amount per position to trade, and place trades accordingly. That way if your SL is hit you lose only $1000.

I'm just curious as to how people determine their risk level.

Thanks

Jar
Mine is a pretty basic Fixed Fractional Percentage. Either 1% or 2% depending on my confidence in the set up. I just do a quick calc when preparing my order, for example:

For a $300 account, say I want to risk 1% on a trade ($3) and the proper place for my stoploss is 10 pips from entry (including spread). I use Oanda, so when I open my trade window, I just adjust my units (lots) so that the little calculator says 1 pip = $0.30.

My potential loss is limited to $3 that way, it's quick, and as my balance (hopefully) grows, so will my 1% at risk. And, the benefit of that is when my account grows into 4 digits, I still won't lose sleep over a 1% or 2% loss.

Ed
Indicators are to Price as Newspapers are to Bloomberg.
Quoting jarcrocker
I hear of money management in almost every post. I posted this as kind of a survey to determine how people determine proper money managment.

Say you have a 10k account and you want to risk 10%. 10% of $10000 is naturally $1000. My question is do the majority of traders......

A: Place a number of positions equal to $1000. So when you SL is hit your loss is actually greater than the risk percentage.

or

B: Take the risk amount, in this case $1000, divide by number of pips when stop loss is hit to determine the amount per position to trade, and place trades accordingly. That way if your SL is hit you lose only $1000.

I'm just curious as to how people determine their risk level.

Thanks

Jar
10% risk per trade is far to much. Start with 1%, the 2% and finally 3% max as your trading improves.

Read the Money Management sticky in the Beginners Forum. Please do yourself this favor

Dial
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
Yes 10% is way too much. I was just using because the math is easier.
don't forget to make weekly limits as well, lose 6% and take a break
Quoting jarcrocker
I hear of money management in almost every post. I posted this as kind of a survey to determine how people determine proper money managment.

Say you have a 10k account and you want to risk 10%. 10% of $10000 is naturally $1000. My question is do the majority of traders......

A: Place a number of positions equal to $1000. So when you SL is hit your loss is actually greater than the risk percentage.

or

B: Take the risk amount, in this case $1000, divide by number of pips when stop loss is hit to determine the amount per position to trade, and place trades accordingly. That way if your SL is hit you lose only $1000.

I'm just curious as to how people determine their risk level.

Thanks

Jar
Suppose your currency denomination is USD and you want to trade GBPUSD. If you trade one standard lot every pip costs you $10 (assuming that you trade standard lots) so if you want to risk 1% of your account on a trade you want to lose at most $100. This means that if your SL is set to 10 pips you can trade 1 standard lot. If your SL is set to 100 pips you can trade 0.1 standard lot or a mini lot. The formula is as follows:

#of lots = (VAR*Account_Balance*Cross_to_USD)/(SL_in_pips*pip_value*Lot_in_dollar)

Where

#of lots = the number of lots you can trade
VAR = Value At Risk (The max percentage of account balance you accept to lose per trade)
Account_Balance = The dollar amount left in your account
Cross_to_USD= If USD is the counter currency (e.g. GBPUSD) this is equal to 1.0; if USD is the base currency (e.g. USDCHF) this is approximately the current bid price
SL_in_pips= Stop Loss stated in pips
pip_value= equals to 0.01 when trading JPY and 0.0001 for other major currencies
Lot_in_dollar= The value of a lot in dollar (standard lot=100000, mini lot=10000, and micro lot=1000)

For example if you want to risk 5% of your account, your account balance is $10000.00, you are going to trade USDJPY at 117.00, and your stop loss is set to 20 pips then your lot size in the trade would be:

#of lots=(0.05*10000*117.00)/(20*0.01*100000)=58500/20000=2.925

This means that if you can trade mini lots along with standard lots you can trade up to a maximum of 2.9 lots, if you can trade standard lots only you may trade 3 lots but your loss would be slighly more than 5% of your accound. If you want to stay on the safe side you won't trade more than 2 standard lots.

I hope this was helpful.
  • Post #7
  • Quote
  • Edited 2:15am Jan 13, 2007 2:04am | Edited 2:15am
Here's how I compute this. I use real leverage. That depends on your account leverage. I use Oanda, so I have a max account leverage of 50:1. Some brokers offer 100:1, even up to 400:1. However, your real leverage should be way, way lower than that.

I'm comfortable with 5:1 real leverage, although there are those that would say that 5:1 is even too high. I would never, ever go beyond 10:1.

The way I figure 5:1 real leverage is that I have 50:1 account leverage with Oanda, therefore 5:1 real leverage is 10% of my balance. That's not my risk, it's my trade size. For example, if I had a $10000 account, I would never put more than $1000 in the market at any given time. That would mean, at 50:1 leverage, that my position size would be $50000, or 5 times my balance, giving me 5:1 real leverage. If I had 100:1 account leverage I would never trade more than 5% of my account at a time, because it would also be 5:1 real leverage.

I used 3:1 real leverage for a long time when I was not profitable, and that practice alone preserved my account to the point that I am profitable now. Leverage, also, should be used to determine total trade size only. In other words, don't say, "My stop loss is 10 pips, so my risk should be 3% of my account", then determine how much $$ 10 pips is at 3% and make a trade that size. You will destroy your account quickly that way, and trust me, I speak from experience. This is my second run at this thing. A few years back I lost my a$$, but not this time...
"The time to act is when others show signs of tire." --W.D. Gann
Some, or most brokers don't allow an account to descend below a certain level, usually $50. So I deduct the $50 from the equity in my account, then calculate the dollars I'm willing to put at risk (Risk Factor times available equity), then divide this by the stop size, including the brokers spread. This is the correct way, for me, to calculate the number of lots to trade.

The risk factor can be calculated employing the Kelly Formula, or by back testing to see what the trading system can withstand. The higher the win% and the higher the average Reward : Risk Ratio, the higher the possible Risk Factor. The distribution of losses, whether random or clustered together, is another factor to consider.
I agree with the max risk of 3% per trade.

but I really dont get why so many people think a high leverage is too risky.
if u use a SL where u can lose a maximum of 3% of ur balance then what difference in terms of risk does it make how much margin u have to deposit?

as i see it a low leverage is more of a disadvantage since u have to have a bigger account. and for instance if u r in a trade and ur SL is already b/e or better and u get another signal u might not be able to take the signal with a low leverage.

of course i agree that if u use a high leverage to risk more than u can afford to lose than it is indeed risky....
regards
Quoting illuminatus
I agree with the max risk of 3% per trade.
I agree.

Quoting illuminatus
but I really dont get why so many people think a high leverage is too risky.
if u use a SL where u can lose a maximum of 3% of ur balance then what difference in terms of risk does it make how much margin u have to deposit?
Go right ahead if you want your account to die The Death of a Thousand Stops.


Quoting illuminatus
as i see it a low leverage is more of a disadvantage since u have to have a bigger account. and for instance if u r in a trade and ur SL is already b/e or better and u get another signal u might not be able to take the signal with a low leverage.
You do NOT have to have a bigger account. I trade a max true leverage of 10:1. On a $1000 micro account I could open up to ten trades simultaneously, or add 9 more micro lots to an exisiting trade, with each at 1:1 leverage for a combined leverage of 10:1

Quoting illuminatus
of course i agree that if u use a high leverage to risk more than u can afford to lose than it is indeed risky....
regards
I agree.
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
Quoting diallist

Go right ahead if you want your account to die The Death of a Thousand Stops.
what is that supposed to mean?
Quoting boiseboy
Mine is a pretty basic Fixed Fractional Percentage. Either 1% or 2% depending on my confidence in the set up. I just do a quick calc when preparing my order, for example:

For a $300 account, say I want to risk 1% on a trade ($3) and the proper place for my stoploss is 10 pips from entry (including spread). I use Oanda, so when I open my trade window, I just adjust my units (lots) so that the little calculator says 1 pip = $0.30.

My potential loss is limited to $3 that way, it's quick, and as my balance (hopefully) grows, so will my 1% at risk. And, the benefit of that is when my account grows into 4 digits, I still won't lose sleep over a 1% or 2% loss.

Ed
This method, except for the tight stops part, has worked for me using Oanda as well. First Rule: Preserve Capital... like a Doctor's First Rule: Do no harm.

Lou
My whole point was that money management should be based on trade size, not stop loss. Go ahead and base it on stop loss, then get stopped to death. What happens is that you start to base your stops on your risk level, instead of basing your stops systemically.

The net effect over time is that your stops are either too tight or too loose, depending on your system, and you either get stopped to death or you're on the wrong side of the market...

Money management should be based on trade size, and stops should be placed systemically, that's just my opinion...
"The time to act is when others show signs of tire." --W.D. Gann
Quoting dukeofdents
My whole point was that money management should be based on trade size, not stop loss. Go ahead and base it on stop loss, then get stopped to death. What happens is that you start to base your stops on your risk level, instead of basing your stops systemically.

The net effect over time is that your stops are either too tight or too loose, depending on your system, and you either get stopped to death or you're on the wrong side of the market...

Money management should be based on trade size, and stops should be placed systemically, that's just my opinion...
What you are trying to explain is another anti-martingale method for position sizing. There are some anti-martingale mehtods in place including but not limited to the following ones:

 

  1. Leverage Target: The one that you suggest
  2. Fixed Fractional: The one that majority of us suggest

In "Fixed Fractional" method you calculate your SL upfront and then calculate your contract/lot size in a way that you won't lose a specific percentage of your account balance if the trade hits your SL. It would be a mistake if somebody adjusts SL to be able to purchase a specific number of lots. You must calculate SL based on your system/analysis and then by considering what percentage of your account (VAR) you want to risk find about lot size.

In your approach you build a leverage target and then calculate the lot size.

I personally believe the best approach depends on the entry/exit strategy you have in place. It would be meaningless to argue around that. Some systems require Fixed Fractional approach while in other systems the trader might choose Leverage Target. It all depends on your backtesting results, your statistical calculations, and the best results that you might aquire by incorporating one of those methods.

I hear from some of the folks about the maximum percentage of the account that you can risk. Again it all depends on your system. For example if hypothetically you have a system with a win rate of 90%+ and a pay rate of 80% it's not unreasonable to risk even over 10% of your account. However, in reality such system rarely exist for a long period of time so we prefer to adjust our VAR according to our system behaviour.

If you do not know the behaviour of your system do not trade it. Assigning a lower risk level won't help you. Believe me. The first step is to get to know the system and make sure it is a winner. Then find the best reasonable VAR according to the nature of the system and of course your financial targets and your psychology of trade.

Good Luck,
Al

The following set of articles may help us to have a better understanding of some MM techniques:

http://www.adaptrade.com/Articles/index.htm
  • Post #16
  • Quote
  • Edited 7:01pm Jan 13, 2007 9:16am | Edited 7:01pm
Hi itme, When employing the Kelly Criteria, do you use the formula exactly as it is, or do you reduce the percent somewhat. I think even Dr Thorp who used the formula in calculating his gambling and his hedge fund reduced the percentage... The Criteria is designed to prevent ruin. and Theoretically one can never reach ruin, but a few lost trades and one's equity is depleted quickly...

You thoughts?


Quoting itme
Some, or most brokers don't allow an account to descend below a certain level, usually $50. So I deduct the $50 from the equity in my account, then calculate the dollars I'm willing to put at risk (Risk Factor times available equity), then divide this by the stop size, including the brokers spread. This is the correct way, for me, to calculate the number of lots to trade.

The risk factor can be calculated employing the Kelly Formula, or by back testing to see what the trading system can withstand. The higher the win% and the higher the average Reward : Risk Ratio, the higher the possible Risk Factor. The distribution of losses, whether random or clustered together, is another factor to consider.
  • Post #17
  • Quote
  • Edited 7:02pm Jan 13, 2007 9:20am | Edited 7:02pm
Originally Posted by illuminatus
but I really dont get why so many people think a high leverage is too risky.
if u use a SL where u can lose a maximum of 3% of ur balance then what difference in terms of risk does it make how much margin u have to deposit?


This is interesting, because in effect isn't what you have actually done in this type of calculation (by determining your risk based on the percent you are willing to risk and then deviding that by the amount of your projected stop loss in base currency), effectively lowered you working leverage?

Ps, This is a great topic for a thread.. I find it very informative the different approaches people have to reach their goals in this regard.
Quoting smjones
Originally Posted by illuminatus
but I really dont get why so many people think a high leverage is too risky.
if u use a SL where u can lose a maximum of 3% of ur balance then what difference in terms of risk does it make how much margin u have to deposit?


This is interesting, because in effect isn't what you have actually done in this type of calculation (by determining your risk based on the percent you are willing to risk and then deviding that by the amount of your projected stop loss in base currency), effectively lowered you working leverage?

Ps, This is a great topic for a thread.. I find it very informative the different approaches people have to reach their goals in this regard.
You are exactly right. If i have a 10 k account and risk 2%, $200, that is what i use to calcualate the number of lots i can trade. THe other factor is how many pips are risked on this trade which REQUIRES you to preset the stop . SO if my stop, based on my trading system and includes the spread that would be lost if the stop is hit, is say...20 pips, i would be able to put on 10 minis, or one standard lot. So my maximum amount to be loss is set. This is a discipline that is learned.

Question: I saw somewhere on the foreign a website or program that you have to pay for, but help s you optimize your size based on different methods. Anyone know?

Thanks..Good trading

Jim No
Quoting james275

Question: I saw somewhere on the foreign a website or program that you have to pay for, but help s you optimize your size based on different methods. Anyone know?

Thanks..Good trading

Jim No
Yes, you ought to check with Philmcgrew. In one of his posts somewhere he shows an example of the MM software he uses... It is quite nice.
Quoting smjones
Yes, you ought to check with Philmcgrew. In one of his posts somewhere he shows an example of the MM software he uses... It is quite nice.
www.adaptrade.com They have a 30 day free trial. I have no affiliation with the author of the software and no motivation to suggest you consider its use. I do own a copy and use it routinely.
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