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Money Management..keeping the money...

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  • First Post: Apr 19, 2006 2:38pm Apr 19, 2006 2:38pm
Im just curious, but I have learned from past mistakes(and other peoples) to take out a profit from your account when you reach a certain point. For example, I always keep a balance of 10000 in my account. When I make a 30% profit, out it comes. I do this because I know that I am sometimes tempted to let a trade go(dont ask, but i sometimes get carried away and hedge currencies against each other to manage risk), even if its going against me thinking it will bounce back(ive been lucky)..its my way of risk management...and its a way to keep your hard earned money from slipping away when you have that temporary moment of insanity.

Does anybody else do the same.? We all have our systems and ways to trade, but emotion does sometimes get the best of you at some point.....no matter how hard we try to contain it. I was curious as to everybodies little tricks..
Have you heard of compounding?

I compound my accounts - the more money I have, the more I trade, the more I make.

Simon
Exactly. By capping your account, you're giving up on your most powerful tool to make money: compounding.

My advice would be to start working on your discipline and MM standards, and let your account grow.
Yes - i dont think there is an effective trading money management system without compouding being involved.

If you dont want to keep whole amounts in your account, perhaps after a say 50% return, you withdraw quarter of your holdings and compound on the rest, till you make 50% again and re-withdraw another 25%. This is just an example, any other system to your comfort can be obtained, but compounding your account is very important, especially in maintaing an healthy account balance.

Think about it....is your account healthier if you make a 20% return on 10,000 - so it moves to 12,000, and you withdraw 2000, so that you start at square one? Or is it healthier if you make a 20% return on 10,000 so it moves to 12,000 - then you withdraw 1,000, leaving your account at 11,000 - thus another 20% return will give you $13,200 - withdrawing $1,200 from here, will leave you with $12,000. And the effect takes place until your account total builds exponentially!
Quoting DrRock
Have you heard of compounding?

I compound my accounts - the more money I have, the more I trade, the more I make.

Simon

DrRock,

Can you give us an example of how you compound ? If you make 1.5% on a trade do you risk some of that profit on the next trade ?

Good man,

boycie.
I simply risk a % of my account balance in every trade. If I start with say $100k and risk 2% I am risking $2,000. If I make $20k I will then be risking 2% of $120k or $2,400 so my position size will be 20% larger as will my profit or loss on the trade.

Simon
I have a totally different mind set. To me its about risk management. Its not about how much money you make, but keep. FOREX has the most risk as an investment(to me anyway), and I treat it that way. Hence, when I take money out of my account, it goes to work for me in other investments that are of interest to me. I dont keep it in one account. It only takes one false slip, no matter how disciplined you are, or stops you have in place, to lose all your profits. My way is my way to manage risk, and to eliminate any anxiety.
using x% of equity for every trade may be the same as pyramid......
and all said to be carefull about it.....

i think it is better for you to use some of the profit and invest it in saver way

(who knows, maybe forex can be used as a save investment )
the others are right. If you are serious about forex then you should use compounding to allow your account to grow, and if you are not serious about forex, well, then you should not trade in this market and you should consider moving your capital to these other investments.

Also, if you use stops, one false move or "moment of insanity" will not kill you. that is why we use stops to limit our risk so that we preserve capital and we may trade another day.

good luck
Compounding is not restricted to a single asset class. Gains from one class can be reallocated to a different class, yet continue to compound.

If you can't get your head around trading more size, then remove your profits and reinvest them elsewhere.
Many traders confuse trading method money management systems for their own personal utilities.

Utility Theory and Prospect Theory are closely allied, in that they allow one to understand how people make choices in situations where they have to decide between alternatives that involve risk, as in financial decisions.

This is very useful knowledge if you plan on continuing trading Forex for serious money.

I have enclosed below a trading test that was on a futures trading forum 8 years ago. It was extremely popular, and had hundreds of replies.

By its continued existence and the variety of personal responses of different traders as to why they would make such and such of a choice, it helped other traders see the reason "why" there is so much diversity of motive and style in trading. Also, why you have a very good opportunity to reap profits because of another guy's personal utility.

(Note: there is no absolute correct answer to the question below. Perhaps a more correct one for people in certain economic strata. (Think of the situations you've witnessed on Deal or No Deal. Everyone's circumstances are unique, hence why there are markets.)


LEONARDO'S TRADING TEST


One day when trader Bob was shopping downtown, he saw a child running across the busy street without looking, just about to be creamed by a bus. Dropping his packages, Bob runs out into the street, grabs and saves the child in the nick of time.

It turns out that the child saw his father get out of his new Porsche on the other side of the street and was rushing to get to him.

The father of the child, a wealthy Wall Street arbitrageur; seeing Bob's display of selfless courage was effusively thankful to the stranger and insists on offering him a reward.

Either he would give Bob his new Porsche right now, (worth $75K) or if Bob would be interested; a free partnership in a small deal that he's working on ---which he makes clear that there would be a 10% chance of returning $1,000,000 in a couple of months. (This is a theoretical value of $100,000.)


Which reward do you think Bob should take?

It would help if you would mention why you think your's would be the best choice.

Me? I've always been a sucker for a nice Porsche. Which makes this question a challenge.


TheRealThing
Quoting TheRealThing
Many traders confuse trading method money management systems for their own personal utilities.

Utility Theory and Prospect Theory are closely allied, in that they allow one to understand how people make choices in situations where they have to decide between alternatives that involve risk, as in financial decisions.

This is very useful knowledge if you plan on continuing trading Forex for serious money.

I have enclosed below a trading test that was on a futures trading forum 8 years ago. It was extremely popular, and had hundreds of replies.

By its continued existence and the variety of personal responses of different traders as to why they would make such and such of a choice, it helped other traders see the reason "why" there is so much diversity of motive and style in trading. Also, why you have a very good opportunity to reap profits because of another guy's personal utility.

(Note: there is no absolute correct answer to the question below. Perhaps a more correct one for people in certain economic strata. (Think of the situations you've witnessed on Deal or No Deal. Everyone's circumstances are unique, hence why there are markets.)


LEONARDO'S TRADING TEST


One day when trader Bob was shopping downtown, he saw a child running across the busy street without looking, just about to be creamed by a bus. Dropping his packages, Bob runs out into the street, grabs and saves the child in the nick of time.

It turns out that the child saw his father get out of his new Porsche on the other side of the street and was rushing to get to him.

The father of the child, a wealthy Wall Street arbitrageur; seeing Bob's display of selfless courage was effusively thankful to the stranger and insists on offering him a reward.

Either he would give Bob his new Porsche right now, (worth $75K) or if Bob would be interested; a free partnership in a small deal that he's working on ---which he makes clear that there would be a 10% chance of returning $1,000,000 in a couple of months. (This is a theoretical value of $100,000.)


Which reward do you think Bob should take?

It would help if you would mention why you think your's would be the best choice.

Me? I've always been a sucker for a nice Porsche. Which makes this question a challenge.


TheRealThing

nice Thread here
OldSchool
Quoting TheRealThing
Which reward do you think Bob should take?
For myself, I would take the 10% chance of $1m. The reason why is that reward has both a higher absolute value ($1m) and theoretical value ($100k) for zero risk. Sure, you could say I risked my life in saving the child, but that event had already passed and could be considered an independent event (even if it inspired the father to give me a reward).
As for taking profits out of my gains, I simply divide what I made by three: one part stays in the account to compound, one part stays in the account but will be taken out when taxes are due, and one part goes into my pocket.

Also, I believe strongly in fixed fractional % position sizing (ie: risking x% per trade). This allows the money to grow exponentially if I'm winning, and money risked to shrink when I'm losing. Sure, you could use Kelly values and optimal f, but the former is not reliable if you happen to have a high number of winning trades, and the formula for the latter seems too complex for people to deal with, as I've seen no fewer than a half dozen definitions of what "optimal f" is.
Well...

From my point, I haven't thought about this. So far I was doing everything right, risking between 1 and 2% on each trade, scaling in positions, etc. Everything was good, nice returns, small drawdowns... until last week.

GBP/JPY was my executioner and of course - my greed and "conviction" that I was right and knew what the market will do.

I read tons of articles, books, topics on MM, capital preservation, psychology, planning, etc.

It just so happened I stayed at home sick since last Tuesday. With nothing better to do I was keeping the trading platform open and checked prices every now and then out of boredom.

On Wednesday the party began. I decided to lower stops, because of course, GY is going up to break 243, I knew it, it was inevitable. On Thursday morning I was in profit above 242, but it wasn't enough, I wanted more. I was due to prepare a report (I manage small funds for a group of investors, with a new load ready in the bank account for a transfer to the broker - this was luckily not yet done). The balance on the trading account was not very high, thank god.

After Asia on Thursday the correction began, we all know how much it dropped till Friday. When I got to a couple % drawdown, I said, no, it's going to start going up, I'm certain... it didn't. I started to hedge, only to get out too soon, get more negative balance.

In the end it was me, my account, my stupid decisions and greed and a 70% drawdown.

The hardest thing was writing the monthly report for the investors. It is a lession I will never forget (I hope). Never again will I be on the computer with the platform open and watching the price action go (I don't scalp, I trade intraday, but even better I like long term positioning).

What is done is done, there is no way to mend it, only to start again, with a huge % to gain, before getting a +/- account balance, then we start accumulating profits again. It hurt and it hurt bad. The worst was that some of the investors are very heavily banked so to speak and could have been my future in the long term if I proved them with good long term (at least a year or two) results.

Anyway... it seems I had to learn it the hard way...

But still I think that compounding gains is the way to go, you can risk less to earn the same sum of money or risk the same % and get more money (keep the investors happy in both situations).

But I have decided to keep the new investment money in the bank account for a week or so and to inform all other (new) investors what happened and if they still want in...
Greed and impatience are our greatest enemies.
Quoting TheRealThing
Which reward do you think Bob should take?

It would help if you would mention why you think your's would be the best choice.

Me? I've always been a sucker for a nice Porsche. Which makes this question a challenge.


TheRealThing
Hi, I'm new here.
In this situation, I think there are other factors to consider. The fact that Bob would be engaged in a partnership with this buisnessman would add value to the second option, beyond just the 1,000,000. Establishing a connection with such a person, and also learning a bit from him, could be very valuable. The first choice would depreciate in value (if you kept the car), and the second could potentially appreciate in value a lot. I'm probably reading waaaaayyyy too much into it.
The scenario is similar to situations given to traders by Van Tharp.

Fellows, if you don't take the car you're choosing a 90% chance of ending up with nothing. Choosing an almost sure loser instead of the Porsche......

Most traders make this mistake. In fact, that's what has been ruining my trading lately and I'm just getting a handle on it again.

When you don't close the trade and take your profit, it's like seeing a $10 bill laying on the sidewalk, the person who lost it is obviously long gone, all you have to do is pick it up. But you walk on and say, no, I don't want it, there might be a $20 around the corner.

I know that's not what this thread's about, but that is what the Porsche scenario is addressing.
Rabax,

I enjoyed your honest and sharing post and hope you don't get down on yourself.

TimeFreedom
1. Take the Porsche.

2. Sell Porsche.

3. Open ECN account.


On MM, I have lately started using the calculator in Oanda's platform. I set the % of margin used, and that of sl and tp as well. Makes it a lot easier for me to enforce my own rules/discipline.
Quoting blueruby
The scenario is similar to situations given to traders by Van Tharp.

Fellows, if you don't take the car you're choosing a 90% chance of ending up with nothing. Choosing an almost sure loser instead of the Porsche......

Most traders make this mistake. In fact, that's what has been ruining my trading lately and I'm just getting a handle on it again.

When you don't close the trade and take your profit, it's like seeing a $10 bill laying on the sidewalk, the person who lost it is obviously long gone, all you have to do is pick it up. But you walk on and say, no, I don't want it, there might be a $20 around the corner.

I know that's not what this thread's about, but that is what the Porsche scenario is addressing.
I don't see this as a mistake, but rather a difference of choice. From a trading standpoint, if you were presented with this choice ten times, and got a million dollars one out of those ten times, you would end up with more money. If you did it twenty times, you would have even more money. Thirty times.... This is speaking of probability, of course. So I really don't see how there is a right or wrong anwer to this. I would take the second choice.
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