Risk Reward Ratio and Account Risk

I came up with an idea that I want to share with you and get your feedback on it. For this idea I use the following concepts/calculations:

Risk Reward Ration = RRR = (S/L in pips)/(T/P in pips)

Example: S/L = 15 pips and T/P = 30 pips then RRR=15/30=50%

Account Risk = AR = the percentage of account size that you want to risk per trade.

Example: If the AR=1% and your account size is $10000.00 then AR=$100

I tried to relate AR to RRR as follows. This the maximum I wish to lose on a single trade.

00% =< RRR < 20% => AR =< 5%
20% =< RRR < 30% => AR =< 4%
30% =< RRR < 40% => AR =< 3%
40% =< RRR < 50% => AR =< 2%
50% =< RRR < 100% => AR =< 1%
RRR >= 100% => AR = 0% (or at most a mini/micro lot if available)

Assumptions:
1. I have a reliable system to trade.
2. I have calculated S/L and T/P based on a reliable method.
3. S/L and T/P are calculated based on the B/E (i.e. spread is counted into my calculations)

What do you suggest?

What are you trying to accomplish here? Specifically with this:

Are you looking for a way to manage risk and determine position size?

That's true. Suppose you have an account size of $10,000.00 and an already tested and profit proven system. Now you want to enter a long trade at 1.8700 with a S/L at 1.8680 and a T/P at 1.8760 In this case S/L is 20 pips below your B/E and T/P is 60 pips above it. Thus RRR=20/60=33%.

Based on the table you are allowed to trade for an AR less than or equal to 3% which means you are willing to risk at most 3% of your account in this trade which is $300 or less. Now since you may lose up to 20 pips you can trade at most a lot size of 1.5 standard lot.

In this situation if you win you'll gain $900 and if you loose you'll loose $300.

With the help of this method I mitigate the effect of those trades that I feel are more risky. For example if I had to set the S/L at 1.8660 (i.e. 40 pips below) then the RRR would become 40/60=67% and my AR would become 2%. That means with a high risk trade I won't allow a drawdown of over 2% of my account which in this case would be $200

If I enter the second trade I would use a lot size of 0.5 only and will lose a maximum of $200 or win a maximum of $300. As you see I simply reduced the chance of losing a big chunk of money on a more risky trade.

Alright, I think I understand what you are trying to accomplish.

The better the Risk:Reward the more (fixed fractional) you are willing to risk. Correct?

There is a very key ingredient that you are missing here. Win percentage. Are you saying that your win percentage is the same on high R:R trades vs. low R:R trades?

What you are purposing is something of a martingale method. It's likely to cause larger than acceptable drawdowns and erratic equity curves. I say likely because all the facts are not in yet.

I will say this. I applaud your interest and focus on money management. It's more important than most realize.

Might I humbly submit some very good articles to read:

http://adaptrade.com/Articles/index.htm

I tested this approach on a strategy that I'm working on right now. Here is the result. I started with $10000 account. So far the strategy has been a winner but I can't publish it right now because I'm not done with the test phase.


<TABLE style="WIDTH: 541pt; BORDER-COLLAPSE: collapse" cellSpacing=0 cellPadding=0 width=722 border=0 x:str><COLGROUP><COL style="WIDTH: 48pt" width=64><COL style="WIDTH: 48pt" span=3 width=64><COL style="WIDTH: 48pt; mso-width-source: userset; mso-width-alt: 2340" width=64><COL style="WIDTH: 48pt" width=64><COL style="WIDTH: 47pt; mso-width-source: userset; mso-width-alt: 2304" width=63><COL style="WIDTH: 48pt" width=64><COL style="WIDTH: 48pt" width=64><COL style="WIDTH: 48pt" width=64><COL style="WIDTH: 62pt; mso-width-source: userset; mso-width-alt: 3035" width=83><TBODY><TR style="HEIGHT: 13.5pt" height=18><TD class=xl23 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext 0.5pt solid; BORDER-LEFT: windowtext 0.5pt solid; WIDTH: 48pt; BORDER-BOTTOM: windowtext 0.5pt solid; HEIGHT: 13.5pt; BACKGROUND-COLOR: transparent" align=left width=64 height=18>Type</TD><TD class=xl24 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext 0.5pt solid; BORDER-LEFT: windowtext; WIDTH: 48pt; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=left width=64>Price</TD><TD class=xl24 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext 0.5pt solid; BORDER-LEFT: windowtext; WIDTH: 48pt; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=left width=64>S/L</TD><TD class=xl24 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext 0.5pt solid; BORDER-LEFT: windowtext; WIDTH: 48pt; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=left width=64>T/P</TD><TD class=xl33 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext 0.5pt solid; BORDER-LEFT: windowtext; WIDTH: 48pt; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=left width=64>RRR</TD><TD class=xl24 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext 0.5pt solid; BORDER-LEFT: windowtext; WIDTH: 48pt; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=left width=64>C. Price</TD><TD class=xl25 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext 0.5pt solid; BORDER-LEFT: windowtext; WIDTH: 47pt; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=left width=63>Profit</TD><TD class=xl34 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext 0.5pt solid; BORDER-LEFT: windowtext; WIDTH: 48pt; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=left width=64>AR</TD><TD class=xl30 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext 0.5pt solid; BORDER-LEFT: windowtext; WIDTH: 48pt; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=left width=64>Lots</TD><TD class=xl35 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext 0.5pt solid; BORDER-LEFT: windowtext; WIDTH: 48pt; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=left width=64>$P/L</TD><TD class=xl35 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext 0.5pt solid; BORDER-LEFT: windowtext; WIDTH: 62pt; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=left width=83>New Margin</TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD class=xl27 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext 0.5pt solid; BORDER-BOTTOM: windowtext 0.5pt solid; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=left height=17>Buy</TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7488999999999999">1.7489 </TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7451000000000001">1.7451 </TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7576000000000001">1.7576 </TD><TD class=xl32 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="0.43678160919537207">44%</TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7451000000000001">1.7451 </TD><TD class=xl29 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="-38">-38 </TD><TD class=xl36 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="0.02">2.00%</TD><TD class=xl31 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num>0.5</TD><TD class=xl37 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="-190">$ 190-</TD><TD class=xl37 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="9810">$ 9,810 </TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD class=xl27 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext 0.5pt solid; BORDER-BOTTOM: windowtext 0.5pt solid; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=left height=17>Buy</TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7419">1.7419 </TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7387999999999999">1.7388 </TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7451000000000001">1.7451 </TD><TD class=xl32 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="0.96875000000000433">97%</TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7451000000000001">1.7451 </TD><TD class=xl29 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="32">32 </TD><TD class=xl36 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="0.01">1.00%</TD><TD class=xl31 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num>0.3</TD><TD class=xl37 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="96">$ 96 </TD><TD class=xl37 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="9906">$ 9,906 </TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD class=xl27 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext 0.5pt solid; BORDER-BOTTOM: windowtext 0.5pt solid; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=left height=17>Buy</TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7357">1.7357 </TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7323999999999999">1.7324 </TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7394000000000001">1.7394 </TD><TD class=xl32 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="0.89189189189190488">89%</TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7394000000000001">1.7394 </TD><TD class=xl29 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="37">37 </TD><TD class=xl36 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="0.01">1.00%</TD><TD class=xl31 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num>0.3</TD><TD class=xl37 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="111">$ 111 </TD><TD class=xl37 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="10017">$ 10,017 </TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD class=xl27 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext 0.5pt solid; BORDER-BOTTOM: windowtext 0.5pt solid; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=left height=17>Sell</TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7435">1.7435 </TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7461">1.7461 </TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7395">1.7395 </TD><TD class=xl32 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="0.64999999999998337">65%</TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7395">1.7395 </TD><TD class=xl29 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="40">40 </TD><TD class=xl36 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="0.01">1.00%</TD><TD class=xl31 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num>0.4</TD><TD class=xl37 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="160">$ 160 </TD><TD class=xl37 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="10177">$ 10,177 </TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD class=xl27 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext 0.5pt solid; BORDER-BOTTOM: windowtext 0.5pt solid; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=left height=17>Buy</TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7418">1.7418 </TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7391000000000001">1.7391 </TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7436">1.7436 </TD><TD class=xl32 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.4999999999999383">150%</TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7436">1.7436 </TD><TD class=xl29 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="18">18 </TD><TD class=xl36 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="2.5000000000000001E-3">0.25%</TD><TD class=xl31 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num>0.1</TD><TD class=xl37 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="18">$ 18 </TD><TD class=xl37 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="10195">$ 10,195 </TD></TR><TR style="HEIGHT: 12.75pt" height=17><TD class=xl27 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext 0.5pt solid; BORDER-BOTTOM: windowtext 0.5pt solid; HEIGHT: 12.75pt; BACKGROUND-COLOR: transparent" align=left height=17>Buy</TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7406999999999999">1.7407 </TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7384999999999999">1.7385 </TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7412000000000001">1.7412 </TD><TD class=xl32 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="4.3999999999984905">440%</TD><TD class=xl28 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="1.7412000000000001">1.7412 </TD><TD class=xl29 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="5">5 </TD><TD class=xl36 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="2.5000000000000001E-3">0.25%</TD><TD class=xl31 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num>0.1</TD><TD class=xl37 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="5">$ 5 </TD><TD class=xl37 style="BORDER-RIGHT: windowtext 0.5pt solid; BORDER-TOP: windowtext; BORDER-LEFT: windowtext; BORDER-BOTTOM: windowtext 0.5pt solid; BACKGROUND-COLOR: transparent" align=right x:num="10200">$ 10,200 </TD></TR></TBODY></TABLE>

Wow! That's amazing.

It seems that I have more homework to do than I thought. I'll read through those articles to better understand your comment. I'll hopefully get back to you very soon. Yes you are right, money management is very important to me. I'll do my best to understand it and create solid premises to land on.

I read the first article http://adaptrade.com/Articles/article-ps.htm. My method is not discussed there but based on the definitions it's more of an antimartingale method rather than a martingale method.

The assumption of this method is the worst case senario (i.e. loss). This method reduces the lot size when the loss size increases and increases the lot size when the loss size decreases so it never causes larger than acceptable drawdowns. This is what I believe. However, I'm still working on it and would be more than happy if you and others let me know about their ideas to enhance this method and/or replace it with a better one.

Thanks,

A true martingale reduces position size after a win and increases after a loss. I was drawing on the similarity only. You are increasing or decreasing position size based on risk to reward. That's why I said it's something like a martingale. But you are right it's not a true martingale and that was problaby a confusing thing for me to post.

Antimartingale's increase position size after a win and decrease after a loss. Your purposed method is based on dependancy rules. i.e. Depending on some aspect of the trade (R:R in this case) you change position size.

I came up with my own system recently.


I basically trade at a Lots Size that means I can take 200pips+ against me, before being margined outta the game, ofcourse if my account takes a bad hit then my Lots keep getting reduced until I get back on my game again.

Little bit agressive maybe, account is small though, will likely increase this number as the account grows.


Keeping me sane and easy to do, to much to think about pre trade and unless you hold for your TP or Stop 100% of the time, the your risk is fixed, your reward likely lower anyway, which makes it all kinda meaningless.

I did a little more research into this idea and still have not been able to find a defined example of this type of money management scheme.

I put a call into my brother who is a CFA to see if he has heard of it. I'll see what he says.

After thinking about it a little bit I would say the following:

You need to know win % associated with these trades. Then you can determine a profit factor at each R:R level.

Once that is done it might be profitable to adjust position size based on the profit factor of a particular trade. The caveat of course is what it will do to your drawdown. That's why I first mentioned the similarity to martingales. Fair or not, I associate martingales with a larger drawdown.

Thanks very much. I really appreciate your help. I need to look into this deeply and revise my money management plan. The idea behind my approach was to mitigate the losses when the RRR is high yet enter the trade. The system that I'm testing on backtest shows over 90% success but the situation on the live account could be different.

In my discussions I refer to AR (Account Risk) as Risk Factor (RF)

I also use Reward Risk Ratio (RRR) instead of Risk Reward Ratio (also RRR). Mine is a positive number, which I prefer.

Risk Factor or Percentage of Account Placed At Risk should depend on a combination of probability of success of the trade as well as the profitability of the trade ( RRR). The higher the RRR (Reward : Risk ratio), the more that should be invested, as the upside is greater. Also, the greater the probability of success, the higher the percentage of capital that should be risked. This is basic common sense in the gambling world.

The precise formula of how these could be calculated would be something like:

AR = RRR (Reward : Risk Ratio) times Probability of Success times some constant

A thorough analysis according to probability theory would be possible to optimise performance of a trading system.

The biggest problem is finding or creating a trading SYSTEM that actually works - ie - is profitable.

iTime,

Thanks. I like your positive attitude.

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<o></o>I believe (if I understand it properly) that MM is a little bit complicated matter. To my knowledge it is reasonable to link directly AR (sometimes called also VAR – Value at Risk) to the system (entry – exit). <o></o>

How to calculate a good VAR? <o></o>

IMHO it depends on your goals or how aggressively you want to trade. <o></o>

Take a last three – four hundred (preferably more) trades – it could be from a backtest. <o></o>

Then simulate (Excel is unbeatable I believe) how much you will gain using different VAR. <o></o>

You should take into account that for different SL amount lost/gained will be directly related to SL, ie: <o></o>

((pips earned)/SL) * VAR is your outcome in a single trade. <o></o>

Then calculate (Excel) gains/losses for a series of trades taking into account compounding (here it looks really interesting). <o></o>

Than decide best VAr for you - but if you want to live trade with this VAR – take also into account slippages etc, generally decreasing profitability. I believe it is reasonable to decrease VAR in the beginning in order to better feel what is really going on with the system, account, platform, psyche. <o></o>

Summarizing: I believe that it is reasonable to adjust MM to main characteristics of the system. And avoiding unnecessary math – Excel will tell us all how much we will gain or loss. <o></o>

I’m not sure if you count SL/TP from your system (Eliott?) or not. TP in most systems “MA related” IMHO should also be calculated (backetested) in order to increase profitability and decrease risk. <o></o>

Also – from my personal calculations – there are systems performing very well at large VAR but … only sometimes. Good market conditions could last two – three months and then collapse. <o></o>

Hope this helps. J <o></o>

Happy trading!!!!<o></o>

Thanks very much. Nowadays, I'm working on MM and am doing my best to enhance my money management skills. Your post definitly helped to have a better understanding of what others do and make better decisions. I'll post my final spread sheet in the near future.

I finally understood your post , forgive me straightforwardness as I’m still having problems with my English.

Here is a main problem I spotted:

“This method reduces the lot size when the loss size increases and increases the lot size when the loss size decreases so it never causes larger than acceptable drawdowns.”

In fact “loss size” is settled when you enter the trade and comprises two parts – SL and VAR.
And you cant simply reduce the loss AFTER entry (of course you can take a portion of a trade
if market goes against you, I can think about usability of this approach)

So your goal is to decrease the risk.

Understanding it as a value at risk I do not know better method than decreasing VAR.

On the other hand – I’m not sure if common def of risk always works. Consider situation when you have high risk/high
reward system and you gradually take a portion of account – and in the end (month, quarter) you have a better outcome
(far better) than risking 2% in regular account. And this is not an academic discussion, I saw and analyzed such systems and their usefulness.

Back to your system:

As I understand you are estimating probability of winning/loosing by calculating relation of “probable gain” to account at risk (VAR)
And you are adjusting size of your position.

1. I believe that is a good method but it would be nice to test it. Could you backtest it for example on 200-300 trades?
2. The one possible problem is with the method you use in calculating T/P – you assume it is reliable.
3. Do you know any other methods of calculating probability of winning in next trade?

We should work on a possible simple test to verify reliability of Risk Reward Ratio as a good estimation of probability of winning in the next trade:
The best one I believe will be a backtest, I will try to figure how to do it a little later, as I have work to do now.

Take care

TESTING RRR 1

Testing predictive power of RRR is easy - in first column A (excel) put +1 if RRR predicts up and -1 if down.

In second - B actual outcome =1 if up, -1 if down.

Use logical function IF(A=B;1;0)

Sum it up over series of trades and divide by number of trades.

Now you have a number between 0 and 1 - good predictors will have outcome close to 1.

TESTING RRR 2

More subtle characteristics of RRR - we can also test how "good" it is in predicting actual moves of the market.

I believe that (actual -predicted value)*(actual -predicted value) summed over a period and then square root of that divided by a number of trades in period will be a good first step.

If your goal is to estimate something else - i can think about a measure to do it properly.

if you have problems with excel - post here two series of data - predictions and actual outcomes i will calculate all myself.

also describe briefly (if you can of course) your method if predicting an outcome of a trade.

forgive me my English, i have no contact with it since 1996.

have a good day...

Ok,

I will just add my 2 bit here since I am also reading up on MM.
The method you describe maybe decreasing your risk. Looks good uptil now.
But the real reason to use MM is to cause an exponential growth in your account equity. I dont see this happening with this type of method. The other popular models will grow your equity faster than this model.

Second point is: you have made a table of how much to risk in your account (AR) depending on RRR. However, you are not considering that the probability of your next trade is always 50%. The only thing which is accurate is how profitable it will be over hundred or more trades.

The only way to test this out is test your trade history with your system and the popular MM available. I am sure that though you maybe decreasing risk on your account, you are not getting an exponential growth comparitively to the other methods.

When you trade for clients or have a large account the primary goal is not
"exponential growth" but preservation of capital commonly
understood as a secure and stable growth.


50% probability you have in tossing a coin.

when you test the predictive power RRR you wil have a different probabilities
of winnning/loosing in next trade, if 50% - then RRR is rather lousy one
and needs improvement as it predicts ... nothing.

You can test RRR separately - and improve it as a separate measure.
It's a good idea - as testing with MM may decrease clarity here.

Then - you can test different models of RRR and different MM
strategies for each one. More parameters means more work in the beginning
but gives better understanding of the whole system and of course better
possibility to adjust the system to one's personality. In my humble opinion...

AparSai's approach I believe is a very modern one because common approach is
to have a rigid MM: for example 1-2-5% in every trade. But depending on market
conditions - you can also change percents, risk less and win more. It's common
in gambling, a very good strategy for decreasing the risk and increasing reward.

Hello Dottore,
Couple of points,
1)We are assuming this applies to the average retail trader. So he would be interested in turning his 2500$ or 25000$ into something substantial. If he is just trying to control his risk, there are plenty of other models available, like fixed fractional method. Though it sounds great that a trader is controlling his risk, if he not making money, its not worth it.
Big funds try and keep their drawdowns minimum while getting a repectable return per year for their clients and this can be 10-30% a year. What is a more likely scenario? A multi million dollar fund trying to get a exponential growth of 300% per year or a 10,000$ account getting 300% per year?
The former needs superhuman trader and the former just a good trader with good moneymanagement.
Tell that to a retail trader who has an account of 5000$ that he is going to get 30% or 1500$ for the entire year as long as his risk on his account is going to be low, well, he might as well try and do something else.
2) The model concerns his AR with respect to RRR. No matter what % of account he is trading,, his next trade probability is always 50%. And if it turns right, its due to the system's probability (win/loss ratio)which can be 60or70% or whatever.
3) The model does not concern the drawdown on the system. No matter what the system, you will at some point suffer drawdown in your account and hit a losing streak. The losing streak of any system is a variable. It can be say 4 trades in a row. so suppose the model tells you to trade 4% of the account on the trade and you hit a losing streak 4 times in a row, thats 16% down already. Very possible scenario.
The strength of any MM model is not only in containing risk but also to cause geometric growth which is only possible in leveraged instruments.
If only risk was the criteria, might as well put money in the bank and earn interest.
Just some of my thoughts to put things in perspective from what little I know about MM. Its a vast subject and open to debate for ever.