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Attachments: Money Management 101
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Money Management 101

lol. I see you have paid your tuition by almost blowing the account entirely. I paid too. Just keep reading on MM, google some ebooks

google: forex money management filetypedf
100% of traders are losers. Just that some win more than they lose!
Quoting dsrfun
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

Hi dsrfun,

I am glad to see that you are getting serious about this. Rest assured you are on the right track, MM will help you maximize your growth and preserve your money.

As per calculating the dependency statisticians recommend looking at 100 trades, on the other hand in order to calculate the confidency limit from the "r" you need to have at least 30 trades in your book.

Oh I almost forgot. Regarding evaluating your system, once you saw a positive ME it means that this market system is potentially profitable and it is the time to forward test it and apply MM. Be careful that the goal in calculating ME is to check if the strategy is profitable in this specific market or not. Simply put you want to check to see if the game that you are playing is profitable not just the strategy. Chances are for some strategy to lose in one market but win in another.

It is the combination of both that counts.

Thanks,

Moh
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.


I'm not sure I quite understand what your saying but the references you give seem to be quite correct in what they say.


Lets say, for the sake of argument, I enjoy the riskier side of life and risk 10% of my account on each trade.

I have 1000 dollars

I see two trade opportunities. One is on the daily charts, one is on the 1 hour chart.

on the daily chart my profit target is 500 pips and my s/l is 100 pips.

on the 1 hour chart my profit target is 50 pips and my s/l is 10 pips.

in both cases I have a risk:reward ratio of 5:1. I have risked $100 on each trade

lets say I win trade 2 and lose trade 1.

this means I have lost 100 dollars (trade 1) and won $500 dollars (trade 2)

my balance now reads $1400, yet my pip statement reads -50 pips.

This is a basic proof that pips do not necessarily equate to profit. It is simply a fact.


lets split this example into two to make it even plainer

trader one only takes trades off the dailies, for some reason he always uses the same profit target and stop loss outlined above(500,100). This trader on average gets 20 trades per month, 100% of them are successful.

(it is an amazingly lucky month)


Trader two only takes trades of the hourlies. For some reason he always uses the profit target of 50 and the stop loss of 10.This trader gets 40 trades per month and has the same 100% success ratio as trader 1


(by the way they are both kick ass traders)


Trader 1 makes 500*20 pips of profit = 10,000 pips

trader 2 makes 50*40 pips of profit = 2,000 pips

so by your reckoning trader 1 is the most successful trader.

However, the two traders each use a different dollar value for each pip. (for each method demands the risk of 10% of their $1000 account).

So Trader 1 only risks $1 per pip. His maximum drawdown on a single trade is $100

Trader 2 risks $10 per pip. His maximum drawdown is also $100.

by this calculation, Trader 1 has won 10,000pips * 1 (where one is the dollar value of the pip) = $10,000 = 1,000% of initial balance

Trader 2 has won 2,000 pips * 10 (where 10 is the dollar value of his pip)
= $20,000 = 2,000% of initial balance

In this scenario, the person who made the least pips was the most profitable.

he is de facto the better trader.

now don't get me wrong, being in positive pips is better than not being so, however you will glean far more information from determining the % increase in your account balance than determining the number of pips it took you to achieve it.
quote of the day: . It's like deja-vu all over again
any bottom fishing/finding MM? until now i just split 1 trade into many(soo many) that in the end it become grid, it works well, but not efective.
Great post Gmak.

Unfortunately pips gained is widely used . It is also fact that $ per pip gained in each pair varies quite a lot between the pairs .
Quoting Enroth
Great post Gmak.

Unfortunately pips gained is widely used . It is also fact that $ per pip gained in each pair varies quite a lot between the pairs .
I quite agree that pips gained/lost are not the actual money. I just guess that people report pips to avoid reveleaing their account info. On the other hands pips are the common language between forex traders.
Quoting Gmak
I'm not sure I quite understand what your saying but the references you give seem to be quite correct in what they say.

now don't get me wrong, being in positive pips is better than not being so, however you will glean far more information from determining the % increase in your account balance than determining the number of pips it took you to achieve it.
Hi Gmak,

Thanks for the great post.

I thought Warper is in the same boat as all of us. I believe his discussion in the other thread was about the importance of analysis over the pips gained/loss, but I might be wrong.

Anyways just wanted to menstion that I agree with you. Unfortunately many traders miss the big picture.

Thanks,

Moh
Hello Moh. I am still evaluating the techniques you mentioned in this thread. What concerns me most is that these techniques make me devote a great deal of my time calculating these stuff. How do you handle this in your day to day trading?

BTW I am still waiting for position sizing techniques you promised in another post.

Yours piply
Quoting PipItUp
Hello Moh. I am still evaluating the techniques you mentioned in this thread. What concerns me most is that these techniques make me devote a great deal of my time calculating these stuff. How do you handle this in your day to day trading?
PipItUp,

I quite agree with you that making these calculations take time, especially for those who don't use computer for recording and tracking the trading results. However I believe that trading is a business and just like any other business you have to be able to dedicate some time to it. Indeed if you want to be successful in any endeavor you need to spend some time on it.

On the other hand these techniques are a bit frustrating for you now just because you are in the beginning of implementing them. Rest assured that after a couple of months you reach to some kind routine in your trading. In fact once you start to embed these techniques in your trading plan (don't tell me you don't have a plan ) then you automatically implement them as part of your plan, that's the first step.

I don't know how familiar you are with spreadsheet programs like Ms. Excel but these tools can simplify your life to a great extent make sure you use them efficiently.

Thanks

Moh
Quoting PipItUp
BTW I am still waiting for position sizing techniques you promised in another post.

Yours piply
I will definitely write about this. There are a number of topics that I want to discuss with you guys like position sizing, diversification, comparing trading systems, asset allocation and ... .

Don't worry we've just started. Stay tuned good stuff is coming up.

Thanks,

Moh
I want to build a very good portfolio.

ETF, Forex, possible Govt securities
100% of traders are losers. Just that some win more than they lose!
Quoting mmeimandi
I will definitely write about this. There are a number of topics that I want to discuss with you guys like position sizing, diversification, comparing trading systems, asset allocation and ... .

Don't worry we've just started. Stay tuned good stuff is coming up.

Thanks,

Moh
Moh,

I can't wait to see this is happening. Keep up the good job.

Thanks,
Al
Ok guys as promised I am going to start a series of posts about position sizing. Hope we can discuss and share ideas and reach a solid strategy backed by mathematical facts.

For those friends who sent me private messages I try to answer most of your questions here for the sake of discussion.

For most traders Money Management simply is Position Sizing. Position Sizing also known is trade sizing or bet sizing is one of the key elements of money management.

Position Sizing is the process of determining how much to trade. Lots of work has been done to streamline this process and the result is different methods and strategies that we can choose from. Some of the bi-products of position sizing include more return, less risk, and smother equity curve.

Some of the most commonly used methods of position sizing, are listed below:

Fixed Size
Fixed Dollar Amount of Equity
Fixed Fractional
Fixed Ratio
Equity Curve
Generalized Ratio
Margin Target
Leverage Target
Secure f

To be honest I haven’t tried some of these methods myself so I cannot do more than just introducing them.

I will start with the first one on the list.

Thanks,

Moh
This method uses the same number of lots for each trade. For example two standard lots per trade or 1 mini lot per trade.

This is the simplest method of position sizing and I guess most traders start with this one. It’s just in the beginning there is so much to learn that we simply don’t bother to learn about money management and position sizing.

I still use this method when I design a new system and would like to calculate the mathematical expectation of it.

It is Needless to say that this method cannot prove efficient in the long run. There is no way to control your risk in this method. In addition to that, betting the same number of lots irrespective to equity is not the wisest thing to do.

I’ve seen some systems that claim to be very profitable using this method. However personally I think if a system is doing fine with Fixed Size, it can do much better using any other method that takes Risk and Equity into account.

Thanks,

Moh
Fixed dollar amount of equity:

A fixed dollar of account equity is needed for each unit, for example $1000 of account equity per standard/mini/micro lot or $5000 of account equity per contract.

This method is mostly used in futures and stock trading. In fact with high leverage involved in FOREX it is kind of difficult to adjust the number of lots with the level of equity. Not to forget that we should always take leverage into account after we did our calculations for the size of the position.

Equity Curve Method:

In this method we size the trades based on crossovers of a moving average of the equity curve. Crossover is a famous way of generating trading signals. Basically trading decisions are made based on crossovers of a longer moving average and a shorter moving average. Same concept is implemented for position sizing only in this method we increase or decrease the trade size when the equity curve crosses above or below its moving average.

This method can be implemented in two ways. One is to stop trading when the equity curve crosses above or below its moving average and to resume trading on a crossover in the opposite direction.

Thanks,

Moh
In order to implement this method more efficiently it is better to have a feel of the system’s behavior. For example if we know, through back-testing, that our system tends to generate streaks of wins and losses, we can stop trading when equity curve crosses below the moving average. In this way we stop trading when it starts to lose, and start trading again when the curve crosses above the moving average again. A dependency analysis can prove helpful in this method.

Another way to implement this method is to reduce or increase the position sizing parameter value on moving average crossovers, or you can alter the parameter value on crossovers in one direction but not the other.

Be careful that in this method you need to have a baseline. For example we might say that the baseline is 1 standard lot per $5000 in equity. Now we can say that we increase the size by 1 lot when equity curve crosses above its moving average and return to baseline when it crosses below the moving average. Please note that this numbers are just for the sake of discussion and by no means are calculated and accurate numbers.

Thanks,

Moh
Quoting mmeimandi
Fixed dollar amount of equity:

Not to forget that we should always take leverage into account after we did our calculations for the size of the position.
Hey Moh can you explain more about this? What do you mean by leverage after calcualtions?
Good thread. It looks like we're just about to get to the meat of it

Quick question with regards to the following statement:

Quoting mmeimandi
we can stop trading when equity curve crosses below the moving average. In this way we stop trading when it starts to lose, and start trading again when the curve crosses above the moving average again.
I'm not sure how the equity curve is supposed to move back above the MA if you're not trading... The curve should remain flat and the MA should converge with it, but never cross it. Please let me know if I'm missing something.

Peace.
Quoting PipItUp
Hey Moh can you explain more about this? What do you mean by leverage after calcualtions?
Hi PipItUp,

As I said this is a common mistake usually made by novice traders when deciding on their position size. They tend to look at how much profit they want to make per pip and then adjust their calculations accordingly to calculate the risk and set the stop loss.

This is wrong and it should be other way around. You need to decide how much you can afford to give away on each trade and then adjust your risk accordingly. As a beginner your only goal is to survive. Once you develop skills and have a strategy in place you can move on to other position sizing methods.

Please take time to review this amazing post by dialist about this same issue:

http://www.forexfactory.com/showthread.php?t=3690

Thanks,

Moh
Quoting fierceman
Good thread. It looks like we're just about to get to the meat of it

Quick question with regards to the following statement:



I'm not sure how the equity curve is supposed to move back above the MA if you're not trading... The curve should remain flat and the MA should converge with it, but never cross it. Please let me know if I'm missing something.

Peace.
Hi fierceman,

Thanks for the comment

Now if you look at the formula for calculating the 10 day SMA:

SMA = X + (X-1) + (X-2)+ ... + (X-9)/10

You will notice that as long as one of the Xs is different in the last 10 series the resultant SMA would be different.

Take this series of equity levels for instance:

5000, 5500, 4000, 4600, 6500, 6700, 5400, 7200, 4800, 5200

The SMA in this case would be:

SMA = 54900/10 = 5490

Now let's say we stopped trading that means another 5200 at the end of the list and eliminating the first 5000 to calculate the SMA

5500, 4000, 4600, 6500, 6700, 5400, 7200, 4800, 5200,5200

SMA = 55100/10 = 5510

Another one:

4000, 4600, 6500, 6700, 5400, 7200, 4800, 5200,5200,5200

SMA = 54800/10 = 5480

The point is although equity could be constant for a couple of runs SMA is not and it will cross again. I guess my wording was kind of vague. I should have said SMA crosses below/above the equity curve. I apologize for that.

Now what happens if we didn't see any crosses for 10 trades in a row? I mean after we added ten 5200 to the end of the list if we still have not seen our cross then we will not see it again.

Although the odds of such an incident would be very rare but I guess that brings it down to a personal decision at that time what we want to do. But I believe all of us want to get back in the game again otherwise why we started in the first place.

As the period of SMA gets longer the odds of such an incident gets lower.

Thanks,

Moh
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