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Attachments: Money Management 101
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Money Management 101

Quoting PipItUp
Hi Moh,

Thanks for all the info. So I assume I can use your new post about "Serial Correlation" to check the dependency between pairs. I read some where that using the linear coefficient I can achive this.

Im gonna make sure to bookmark this thread it is really informative.
Thanks PipItUp.

Moh
Quoting Mr demark
My input on this thread is that i dont recommend a trade that does not have at leaST a 2:1 profit:lose ratio.

chances are u will only win 50% or less of your trades
Mr demark,

Thanks for the input. I somehow explained this in an earlier post. I mean having an edge is very important. However I believe instead of checking this for each and every trade it is better to look at the results over a longer period. Chances are you come across some trades that don’t have a 2:1 ratio but it is better to stick to the plan and let the system does its job.

In addition, I believe setting some hard rules is not a good way to go. Trading in my opinion is dependent on many factors. Age, experience, margin, psychology to name a few. One strategy that is suitable for a trader who just started might not be suitable for one who has been trading for two or three years. The most important issue for the first one is to learn and basically to survive in the market, however for the latter maximizing profits and growing optimally might be the first priority.

Thanks,

Moh
Quoting jest1081
Over the long run with proper MM it is proven most traders will become profitable. But something ticked me and i have heard this from two people in this forum already, those who are above average are in a different class alltogether. Its as if they know when and how to beat the red lights? Pattern recognition is probably the most important thing in trading charts?

How important is analysis in our trading? Traders game is to make money in the market, while thje ANALyst throw alot of crap on the TV, to become really profitable in this business does it constitute a huge sum of analysis or all we really need are just some basic entry triggers and exit rules? Please share your views and concerns.

regards
jest1081,

I personally don't believe in listening to TV for trading. Not because I have something against analysts. In my opinion to be successful we need to have a documented plan and follow it no matter what. (Of course after making sure that the plan has an edge by checking ME, back-testing and forward testing on a demo and a small live account)

You are right, what we really need are just some basic triggers and exist rules but that's just to begin with. Next step is to have a plan for how we are going to manage our money. Trading is no different than any other business. You should manage your cash flow accurately otherwise no matter how good your system is, you are not going to make the best out of it.

I read the analysis to get a feel of the market for the day and that’s it. Of course that’s just me, others might like a more fundamental way of trading.

Thanks,

Moh
Quoting Mr demark
I think we need to post examples of trades with proper money management. Without this, many will be lost. And yes, i believe a proper MM will beat the economic analysis. Technical analysis coupled with MM on the other hand, will produce excellent result
Coudn't agree with you more.

Thanks,

Moh
Quoting Gwan
hello mmei mandy,

while the outcome of the news is predicted by the outcome of previous news, why not the trade? is it purely analysis?

Hi Gwan,

The price action that we see on the charts is the result of emotional reactions of huge number of traders in the market. I mean don’t get me wrong there are other factors like corporations, financial institutions and governments that change the price but at the end it is that “Traders Pool” that reacts to these changes and moves the market. In fact great number of indicators that we have are created to plot these emotional reactions on the chart so that we can visualize them and use them to our benefit. This I believe accounts for the uncertainty of the markets. You never know how people react under pressureJ

Thanks,

Moh
Quoting mmeimandi
Mr demark,

Thanks for the input. I somehow explained this in an earlier post. I mean having an edge is very important. However I believe instead of checking this for each and every trade it is better to look at the results over a longer period. Chances are you come across some trades that don’t have a 2:1 ratio but it is better to stick to the plan and let the system does its job.

In addition, I believe setting some hard rules is not a good way to go. Trading in my opinion is dependent on many factors. Age, experience, margin, psychology to name a few. One strategy that is suitable for a trader who just started might not be suitable for one who has been trading for two or three years. The most important issue for the first one is to learn and basically to survive in the market, however for the latter maximizing profits and growing optimally might be the first priority.

Thanks,

Moh
agree, but sometimes less is more. Fewer trades fewer losses
100% of traders are losers. Just that some win more than they lose!
Quoting Mr demark
agree, but sometimes less is more. Fewer trades fewer losses

In my opinion it also depends on your trading method. If you are a trend follower then I'm afraid I disgree. As a trend follower I need to exploit every oppurtunity to its fullest.
exactly, which means that u expect the trend to continue.. just like myself. But i wait until the candlestick formations occur, that way i can risk small for the long haul run.

i'm in agreement with you cuz i see we mean similar
100% of traders are losers. Just that some win more than they lose!
Quoting Mr demark
exactly, which means that u expect the trend to continue.. just like myself. But i wait until the candlestick formations occur, that way i can risk small for the long haul run.

i'm in agreement with you cuz i see we mean similar
Sorry guys it was a long weekend in Canada and I was away for a few days.

All right, I guess what PipItUp wants to say is that generally trend following systems trade less than for instance a Break-out system that’s why he prefers not to lose any chance to put on a trade. Is that right PipItUp?

Thanks,

Moh
  • Post #50
  • Quote
  • Edited 11:34am Jul 4, 2007 11:11am | Edited 11:34am
Hi mmeimandi.

I dont know if you are new here, but for the last months there has been a discussion that has been developing here in an endless way. Some might say that this is starting to get boring (and i agree) but, i like when i see ppl using mathematics to disproof another mathematical wrong ideas.

And what i mean by this, is that, the last arguments have been using in wrong a way, mathematical possibility instead of mathematical certainty.

Im not sure i understand but, in your view, if the trading is bad, not matter what kind of fantasy ppl have about changing margin to compensate other trades, the bottom line is that without pip consistency, we will fall, despite the wierd belief that we might be more sure about making one big position trade to compensate the loser small position one.

If you want, you may read, the last posts about this (quotes includes, "my opinions")

http://www.forexfactory.com/showpost...3&postcount=57

http://www.forexfactory.com/showpost...5&postcount=68

http://www.forexfactory.com/showpost...3&postcount=71

And if you have time and patience, you can read the next one but the posts above 1,2 and 3 are the priority.

One of the biggest threads about this:

http://forexfactory.com/showthread.php?t=26657

My opinions and replies start on the third page. http://forexfactory.com/showthread.php?t=26657&page=3

But it might be better to get a feel of what was said before.

So, what do you think? Its possible to elaborate something of matemathical miracle (increasing position size miracles) to overcome a bad market analysis?
  • Post #51
  • Quote
  • Edited 11:47am Jul 4, 2007 11:31am | Edited 11:47am
Money management alone cannot help, u need good analysis to go with it. They complement each other.

A person with good TA (technical analysis) would probably win some trades but he needs MM to go with it so as to lower his risks in the long run.

as for me, i tend to move to Break even after a certain level has been reached, lock in pips as i go along letting my profit run and moving my stops. That is a part of my money management strategy.

a trader must also be consistent with his risks and to not over leverage

IF the trader has an edge, then let him use it.

Mathematical miracles wont help (if any exists)
100% of traders are losers. Just that some win more than they lose!
How do we calculate matematical expectation?

Lets take a simple trading system example, Moving Average 20 system (Just one indicator MVA20). How do I calculate the expectation. How can we find out total number of trades to consider for ME calculation. If I consider 10 recent trades ME might be positive and If I consider 20 trades -ME and for 30 +ME ????????

So looks like ME is just for a given time period for a system.

--------------------
SO my question

+ME for previous 20 trades
-ME for previous 30 trades
+ME for previous 40 trades
-ME for previous 50 trades

Can I use this trading system? Or Am I missing an important point here?

-------------------

I am just a beginer in trading world. Thanks to Moh for his excellent post on Money Management.

-Sud
Quoting Warper
Hi mmeimandi.

So, what do you think? Its possible to elaborate something of matemathical miracle (increasing position size miracles) to overcome a bad market analysis?
Hi Warper,

Thanks for taking the time to read the thread.

Well my answer to the above question would be no. However as I mentioned in another post I am an advocate of strategy trading. I dont analyze the market each and every time I want to put on a trade. Quite contrary I tend to develop a system and make sure it has an edge then wrap it up with MM techniques and start to trade it.

I don't believe in changing the position size based on the result of another trade unless there is strong evidence that there is dependency between trades; which is very rare.

Another reason is based on math. The formula to calculate the Mathematical Expectation of a system is:

∑(Pi * Ai)

Where: P is probability of winning or losing, A is amount won or lost.

The summation of negative numbers is always negative that's why changing A (which is the result of your change to position size) is actually going to hurt you even more.

One thing that I have to clarify here is this discussion is only relevant to strategy trading.

Thanks,

Moh
Quoting mmeimandi
Mr demark,

Thanks for the input. I somehow explained this in an earlier post. I mean having an edge is very important. However I believe instead of checking this for each and every trade it is better to look at the results over a longer period. Chances are you come across some trades that don’t have a 2:1 ratio but it is better to stick to the plan and let the system does its job.

In addition, I believe setting some hard rules is not a good way to go. Trading in my opinion is dependent on many factors. Age, experience, margin, psychology to name a few. One strategy that is suitable for a trader who just started might not be suitable for one who has been trading for two or three years. The most important issue for the first one is to learn and basically to survive in the market, however for the latter maximizing profits and growing optimally might be the first priority.

Thanks,

Moh
Hi Moh,

I want to emphasize that I quite agree with you. One needs to find his/her trading style and know the nature of a trade to make sure they are aligned with each other. Some systems might come with a profit rate far below 2:1 or a win rate less than 50% but there are still some people that trade them and make money with them.

I'm also a great fan of analysis. The more you know about the behaviour of a system the less stress you are imposed to. I recommend to constantly monitor your portfolio and your system.

Thanks for your great thread,
Al
Quoting dsrfun
How do we calculate matematical expectation?

Lets take a simple trading system example, Moving Average 20 system (Just one indicator MVA20). How do I calculate the expectation. How can we find out total number of trades to consider for ME calculation. If I consider 10 recent trades ME might be positive and If I consider 20 trades -ME and for 30 +ME ????????

So looks like ME is just for a given time period for a system.

--------------------
SO my question

+ME for previous 20 trades
-ME for previous 30 trades
+ME for previous 40 trades
-ME for previous 50 trades

Can I use this trading system? Or Am I missing an important point here?

-------------------

I am just a beginer in trading world. Thanks to Moh for his excellent post on Money Management.

-Sud
I personally use at least 100 trades and at least 2 years of backtesting to evaluate a system. However, this is another discussion that can be discussed in more detail.
  • Post #56
  • Quote
  • Edited Jul 5, 2007 2:56pm Jul 4, 2007 3:01pm | Edited Jul 5, 2007 2:56pm
Quoting Warper
Hi mmeimandi.

I dont know if you are new here, but for the last months there has been a discussion that has been developing here in an endless way. Some might say that this is starting to get boring (and i agree) but, i like when i see ppl using mathematics to disproof another mathematical wrong ideas.

And what i mean by this, is that, the last arguments have been using in wrong a way, mathematical possibility instead of mathematical certainty.

Im not sure i understand but, in your view, if the trading is bad, not matter what kind of fantasy ppl have about changing margin to compensate other trades, the bottom line is that without pip consistency, we will fall, despite the wierd belief that we might be more sure about making one big position trade to compensate the loser small position one.

If you want, you may read, the last posts about this (quotes includes, "my opinions")

http://www.forexfactory.com/showpost...3&postcount=57

http://www.forexfactory.com/showpost...5&postcount=68

http://www.forexfactory.com/showpost...3&postcount=71

And if you have time and patience, you can read the next one but the posts above 1,2 and 3 are the priority.

One of the biggest threads about this:

http://forexfactory.com/showthread.php?t=26657

My opinions and replies start on the third page. http://forexfactory.com/showthread.php?t=26657&page=3

But it might be better to get a feel of what was said before.

So, what do you think? Its possible to elaborate something of matemathical miracle (increasing position size miracles) to overcome a bad market analysis?
....

Another issue that I noticed in the posts was about consistency. For sure consistency is very important but it is not the only key factor. If it was we were better off putting our money in the bank instead of trading it since this is the most consistent way to grow your account.

In deciding about what system to follow we need to keep other factors like the rate of growth and drawdowns in mind as well.

In my opinion (actually you can see that it is my motto) while trading we need to forget about individual trades and look at the account in a long run. Changing positions based winning or losing or trading based on our guts is not an option. Of course that's just the way I see it.

Thanks

Moh
Quoting dsrfun
How do we calculate matematical expectation?

Lets take a simple trading system example, Moving Average 20 system (Just one indicator MVA20). How do I calculate the expectation. How can we find out total number of trades to consider for ME calculation. If I consider 10 recent trades ME might be positive and If I consider 20 trades -ME and for 30 +ME ????????

So looks like ME is just for a given time period for a system.

--------------------
SO my question

+ME for previous 20 trades
-ME for previous 30 trades
+ME for previous 40 trades
-ME for previous 50 trades

Can I use this trading system? Or Am I missing an important point here?

-------------------

I am just a beginer in trading world. Thanks to Moh for his excellent post on Money Management.

-Sud
Hi dsrfun,

How far back you want to look the history is optional but it should be long enough to give you a proper answer. Basically digging two years of history should be enough. Of course that depends on how many trades your system has put, in the last two years. As long as it is not less than 20 you should be fine. If it is 50 better and closer to 100 better yet. It's kind of hard to find reliable data for longer time period so don't sweat it.

Thanks,

Moh
Quoting aparsai
Hi Moh,

I want to emphasize that I quite agree with you. One needs to find his/her trading style and know the nature of a trade to make sure they are aligned with each other. Some systems might come with a profit rate far below 2:1 or a win rate less than 50% but there are still some people that trade them and make money with them.

I'm also a great fan of analysis. The more you know about the behaviour of a system the less stress you are imposed to. I recommend to constantly monitor your portfolio and your system.

Thanks for your great thread,
Al

Thanks Al,

Moh
Quoting mmeimandi
Hi Warper,

Thanks for taking the time to read the thread.

Well my answer to the above question would be no. However as I mentioned in another post I am an advocate of strategy trading. I dont analyze the market each and every time I want to put on a trade. Quite contrary I tend to develop a system and make sure it has an edge then wrap it up with MM techniques and start to trade it.

I don't believe in changing the position size based on the result of another trade unless there is strong evidence that there is dependency between trades; which is very rare.

Another reason is based on math. The formula to calculate the Mathematical Expectation of a system is:

∑(Pi * Ai)

Where: P is probability of winning or losing, A is amount won or lost.

The summation of negative numbers is always negative that's why changing A (which is the result of your change to position size) is actually going to hurt you even more.

One thing that I have to clarify here is this discussion is only relevant to strategy trading.

Thanks,

Moh

One thing I wanted to add to this is that due to compounding, negative earnings have a magnified effect on the portfolio. Depending on the trading system and the size of wins it usually takes some time to break even after a loss and it is all because "return" is not simple rather it is compound , meaning that since we reinvest the income in the markets again the effect of wins and losses are geometric.

Thanks,

Moh
Hi Guys,

I am trying to evaluate a system based on the mathematical equations given in this post. The trading system is based on daily charts so i am using the data since 2002

As suggested by Moh in previous post I have calculated ME for all the trades since 2002. I found that the ME is gradually increasing and decreasing (with profits and losses). After some days the ME remained +VE.

The problem is with the runs test and Serial Correlation. Should we calculate this only for a shorter periods (last 10 or 20 trades) to make sure the correlation exists or does not exists in the recent days. The problem is again how many days to consider?

Does any of you guys really use these techniques in your daily trades or just implement MM based on the risk percentage? (1, 1.5, 2% etc ...)

And by the way I have almost blew my first live account (may be in the next few days unless things dont turn my way again). Fortunately I was trading with very little amounts in my account. My account almost doubled in 7 months and lost every thing in the past one and half months. I guess this might be because of POOR MONEY MANAGEMENT. So I am trying hard to understand this LIFE SAVER PILL MONEY MANAGEMENT when things dont go the way we want..... I came to know from my recent readings that traders start to belive in MM only after they blew up the first account and sadly I am one of them .

And yeah I have used compounding in an attempt to quickly build equity and it DID work till the things went my way but the same thing brought me down quickly also....

Thanks
-Sud
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