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Money Management Theory

Quoting tiborf71
there is no golden rule in money management, but money management must adapt to the hit rate of the strategy used.
Hello tiborf71,

I would argue that instead of money management needing to adapt, that a money management scheme should be integrated with the strategy being used. It should be developed as part of your overall strategy.

- Ric
Be humble or get humbled
Quoting Drakman
Money management should be adaptative to the volatility of the market.
Hello Drakman,

Thanks for posting. Again, just like the previous post and what I have been saying all along, I am a firm believer that money management/risk management should be built in/part of the edge/strategy/style of trade you have decided on. If it can not scale up with success and/or adapt to a ever changing market, one will find hard times ahead.

- Ric
Be humble or get humbled
I like very much your discussion here, but I think that you are complicating things a bit. Idea with MM is simple – dont put all eggs into one basket.
I think money management is another fairy tale. It is just "ha, that's why you fail". There are several here: always use stop losses, trade manually on higher tfs, use proper money management, use fixe RR ratio etc.

Example: if I'm earning 3% daily. What is is the difference if I use 10, 30 or 50% for re-invest? But if I earn -10% today, +3 tomorrow, then +7% next day, then again -1%... totally +4% monthly how the heck any money management can help me?

But by other hand mm in general is very powerful approach. Remember that example of buying car using credit, or buying property for lend using credit and buying a car. In first example you will have getting cheaper car and debts, in second you will have passive income, property and a car.
greed and fear
Quoting riclater211
Hello All, Forex Trading is mix of both art and science. It takes some intuition as well as basic rules of simple concepts to trade the Forex market with any kind of measurable success. One thing I do not see a lot of focus on is money management. Arguably the most important part of trading. I see many threads that tired to discuss it but quickly died. Against my better judgement, I will try and keep a thread alive on this very important part of trading. I guess the best way to begin is touch on how I run my management. Here we go. I trade the Daily...
I like the topic. Thanks for starting the thread

I want to make sure I'm thinking on the same page as you are.

In your example of adjusting your risk based on your portfolio value at the start of every month, is that your method of money management?
Kind of like rewarding yourself with more risk if your method is working and portfolio value is going up and on the opposite side, taking away risk if your portfolio/trading isn't going up?

Thanks in advance for the reply
Model 3 All Time Pips: 1,791
Thank you Ric.

I was trading with NO STOP LOSS for more that 2 years, but then the big movement on oil in early 2020 showed me that trading without stop loss is not suitable for long term goals. If you have no stop loss, you might blow your account on black swans events.

Now I'm using partial stops and I ligthen the position progressively.
Abondance Profit This Month: -€345
Quoting Inadame
I like very much your discussion here, but I think that you are complicating things a bit. Idea with MM is simple – dont put all eggs into one basket.
Hello Inadame,

Thanks for posting.

Money management can be complicated or easy. It just depends on the person trading and what makes them feel comfortable. I am not complication anything. I created a MM scheme that makes me comfortable and confident in my trading. I laid out what I do in my first post. It may be a lot of words but it is actually very simple.

Not putting all your eggs in one basket, with all do respect, is not a strategy for cash management. How do you define that anyway? All in one basket meaning do not just trade 1 pair? One currency? One market? What do mean? I am here if you would like to explain further.

Thanks,

- Ric
Be humble or get humbled
Quoting ryuryu
I think money management is another fairy tale. It is just "ha, that's why you fail". There are several here: always use stop losses, trade manually on higher tfs, use proper money management, use fixe RR ratio etc. Example: if I'm earning 3% daily. What is is the difference if I use 10, 30 or 50% for re-invest? But if I earn -10% today, +3 tomorrow, then +7% next day, then again -1%... totally +4% monthly how the heck any money management can help me? But by other hand mm in general is very powerful approach. Remember that example of buying car...
Hello ryuryu,

Thanks for posting.

Every business on the planet has to manage money. If not, you are all but guaranteed to fail. The topics you mentioned that are fairy tails:

"always use stop losses" - There is a misunderstanding in general with rookie traders about stop loss. All it is insurance against a Black Swan Event like when when the Swiss National Bank unpegged the Swiss franc from the euro. No way you could have done anything against it even with you right there.

For me it is used as that , insurance, but mostly I use it as a manual trailing stop. I trade EOD on the daily charts so I obviously can not be watching charts all day. I only check every 12 hours. Noon and midnight. It is rare that I hit an initial stop loss. For me it works. I am not saying you are wrong if you do not use SL in your trading, I am saying it is very dangerous to trade without one.

"trade manually on higher tfs" - Nobody can tell anyone how to trade. So long as your happy and you are hitting your short term goals, you are doing fine in my book. I will say that longer time frames, in general, produce higher quality signals vs shorter time frames. I like to think of it like this.

Shorter time frames are like trying to catch 1 of 1000 bees with your hands. You are sure to catch many, but how many will sting you.

To realistically become wealthy from trading Forex you must understand it is a marathon not a race. Take this in your mind and understand.

"use proper money management" - Yes you should do that. Otherwise just burn your money.

"use fixe RR ratio" - This I actually agree with you. Partly. It is nice to have a goals. It's good as well. My issue is, and I have seen this many times, traders become married to this number. If the market turns it turns. You will not always hit your RR. In the end a positive trade is always, ALWAYS better than a loss. When it comes to fixed number, I agree with you. Trading is dynamic, so should your RR. If volumes are down, how can you expect to hit the same RR. 2010 trading and 2020 trading are very different.

The rest of your post needs a lot explaining that I just can not convey in a post.

Best of luck to you.

- Ric
Be humble or get humbled
Quoting RedWingFan
{quote} I like the topic. Thanks for starting the thread I want to make sure I'm thinking on the same page as you are. In your example of adjusting your risk based on your portfolio value at the start of every month, is that your method of money management? Kind of like rewarding yourself with more risk if your method is working and portfolio value is going up and on the opposite side, taking away risk if your portfolio/trading isn't going up? Thanks in advance for the reply
Hey RedWingFan,

Thanks for posting.

Thank you for your words. I truly believe that money management is the missing part for many traders.

It is loosely based on DCA (Dollar Cost Averaging). I have been using DCA for my Stocks/Bond/Mutual Fund portfolio for years. When it comes to FX trading, I rely on % over anything else. So although the dollar amounts may change, the risk % stays the same.

Example:

$50K Month start

Pip is $5 per/ risk is max 1.5% ( average is 1%) or between $500 - $750

End of month lost $2500/500 pips/5%

Start of new month $47500

Pip is $4.75 per/ risk is max 1.5% ( average is 1%) or between $475 - $712.50

End of month gained $3800/800 pips/8%

Start of new month $51300

Pip is $5.13 per/ risk is max 1.5% ( average is 1%) or between $513 - $769.5

etc...

All my % stay the same. Yes the numbers change but everything else stays. Working with that keeps me in check. Keeps me disciplined. If I hit a streak of bad trades I do not compound it. The actual dollar amount of account shrinks with each losing month, it goes up with each winning month. Stood by me well over the years.

Hope that helps.

- Ric
Be humble or get humbled
Quoting Drakman
Thank you Ric. I was trading with NO STOP LOSS for more that 2 years, but then the big movement on oil in early 2020 showed me that trading without stop loss is not suitable for long term goals. If you have no stop loss, you might blow your account on black swans events. Now I'm using partial stops and I ligthen the position progressively.
Hello Drakman,

Thanks for posting.

Thank you for sharing your experience. Trading without stops is very dangerous. Maybe folks with a few hundred dollars in their accounts can live with losing it, but once you have a sizable account, good luck to everyone , you would be unwise to trade without stops. You trade, you learn.

Good job.

- Ric
Be humble or get humbled
Forex trading is full of opportunities. Anyone who is ready to take the challenges can go ahead without anything stopping them.
People always tells you need a good risk/money management but never teach you how to do so or where to learn about. IMHO, it could definitely be a game changer on Forex.
Quoting tancratchit
Forex trading is full of opportunities. Anyone who is ready to take the challenges can go ahead without anything stopping them.
Hello tancratchit,

Thanks for posting.

I 100% agree with you. If folks would take it seriously, Spot Forex can generate wealth. The issue is not everyone can do it. Just like not everyone can be a doctor. I tried, until I realized I can not separate what happens in hospital from home. Seeing sick and dying kids, families in waiting rooms clinging to hope when you know there isn't any. No thanks. I like the cold hard numbers of trading. No emotions needed.

- Ric
Be humble or get humbled
  • Post #94
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  • Last Post: Dec 9, 2020 7:09pm Dec 9, 2020 7:09pm
Quoting ercioalendre
People always tells you need a good risk/money management but never teach you how to do so or where to learn about. IMHO, it could definitely be a game changer on Forex.
Hello ercioalendre,

Thanks for posting.

I agree, good risk/money management is essential in any business. Forex is no exception. The whole point of this thread is to help people with good risk/money management . I was hoping it would be a place folks would share how they run good risk/money management. I started by explaining how I run mine in the 1st post. By no means is my way the best way or even the right way. It is just my way. It works for me and allows me to be comfortable with the amounts at risk. That is an important factor. It helps keep emotions in check. That and being comfortable/confidant in your trading methodology/strategy/edge.

I would say that depending on how and what you trade, the amount of money you are trading with and what your short term and long term goals are, should all be taken into consideration on how to implement a good risk/money management scheme. Talk to others with similar trading habits as you. Scalping, swing trading whatever. Build a money management scheme around the things you learn that fit your style, personality and psychology. You may be pleasantly surprised with the results.

Good Luck.

- Ric
Be humble or get humbled
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