Best Money management?

Hi,

I trade forex with 3 differents EA. ( Created by myself and not for sale so do not ask pls)
One for ranging
one for trending market
one weekly breakouts/trend.

Today I use a very flat money management.

So I want this thread to talk about MM.

Martingale is not a MM for me so skip it

In any system, I’ll encounter both winning and losing trades.
So I’ll want to be able to easily handle any losing trades, and continue to trade the winning trades at the same time, so that I have a profitable system.

Example
As an stupid example, if you put say a large chunk of your cash into each trade without a position sizing model, and you make a profit, great, your profit will be much bigger than if you did have position sizing rules. But if your next trade is a loss, you may lose your cash, and that’s the end of the trading!

Let’s take a more normal example.

Let’s say that your forex trading system has an 80% win-loss ratio, and that the size of your winning trades are on average 3 times that of your losing trades. This is your trading edge. This is why you can profit from your trading, whereas someone else who has no system, or is using an ineffective system, is unlikely to profit except out of pure luck.

But even with this trading edge, I may hit a string of losses.

So even with a good system, I still need to have an appropriate money management model to survive and prosper... Right no ?

So more mind work

Let’s say that you’re trading account is $5000, leveraged up to $500 000, that is with 100:1 leverage. And let’s say that the maximum DD of your system historically is $2500, when following a particular money management method. So in this case, the drawdown is 50% of the cash float. Maximum historical drawdown -DD- refers to the biggest decrease in the cash that has occurred in the past when backtesting or trading your system.

Now if you’re trading a good profitable system, then with the risk management rules that the system is designed to use, you can go on to make the profit that year that the system will generate. Say the system made 500% on your cash float that year. This means that by trading with that system, and its money management rules, you were then able to overcome this 40% loss, to end up 500% in profit.

That is, you rode through the drawdown period, continued trading and made this tidy profit.

And another reason to have appropriate money management is that in the beginning, you may make mistakes in your trading. So your losses in the beginning days may be higher than necessary.

That's why money management is important for any trading, including forex trading.

So let’s summarise these two crucial points so far:

1. Money management is important, as it lets you live to tell the tale, and profit well!

2. The performance of a system, in terms of profits, drawdown, or any other parameter you want to measure, depends on both the system itself and the money management rules it uses. A system should suggest a range of acceptible money management method or rules which gives best results, that is, good profits and an acceptable drawdown.

So lets talk about all good money management method .....

So what is it that you want to discuss? How to manage a trade, or how to divide a position or something else? Or you just want to talk about how important MM is? And it seems like you are looking for MM for mechanical systems since you are using EA's.

Excellent... I was going to start to a new thread on this, MM trading.

The more and more I look at trading the forex and the more and more i think about it... it is all about MM and making profitable trades even with DD.

You will never find the best entry, but finding an optimal entry is the way forward with good money management, position averaging and hedging.

This is the key to being successful in forex for me, these are the corner stones of my trading style and I need to think on this, not too hard and improve on this.

I was reading a book today and it really hit home to me, that is why most traders lose money, poor MM and guess work, moving average cross overs, etc.

Trading plan is a must, do not get attachted to the trade - be like a robot.

I feel we can talk and talk about MM till we go blue in the face, how do go about trading this MM method:

1. When do we go short or long?
2. What do we look at for going short and long?
3. What is our RR?
4. What time frame do we look at?

Overall how do we define out entries? This does not have to be precise, right at the HL/LH or LL/HH, but a good area to get in and then manage the trade to be successful - this is the key.

SL always get hit... so when and how do we determine our next move when this has been hit, do we reverse and go short/long, etc...

Regards,
Vip

The first item you need to determine is 'Are your methodologies profitable?'
MM will not make an unprofitable system profitable.
Have you read:
http://books.google.com/books?id=C0C...esult#PPR13,M1

I liked the book, some do not like it.

%R

I think as other do that MM is one cornerstone for a good result so I want that we talk about it.

No MT4 code stuffs. Just the different methods so we all here in FF increase our equity on the good way.

i always use 2% for each my trade..with 40-60 pips SL..but i dont put my SL since i've heard before broker will hunt our SL (it is true??)..so what i do, i manage my SL with an EA, if the price goes againts my trade and reach my SL limit, it will automatically close the trade..

My risk is always 1%. I like to scale out and get a BE trade as soon as possible, and I only take trades with small stoploss size (no more than 20-25). If I risk 15 pips, then I close half position at 15 pips and leave the rest at initial sl and letting it run, making this trade a minimum BE trade. Further through the day I'll close out even more of the remaning part (more that half of it) and doing so I lock in some more profits. I let the remaining part run and make it into a swingtrade at initial sl, this sl will be trailed based on s/r areas. This way I might build a few positions if I catch a trend. I never risk more than 3% total, so I never have more than 3 trades on at the same time. If one trade has reached BE then I can open a new trade, so never more than 3 trades at the same time that hasn't reached BE.

There seems to be a dearth of good books on money management in trading in particular subject of position sizing. Can anyone recommend a good book that they have read? I can recommend Daryl Guppy's book on Money Management, but I'd like to read more.

Thanks for all advices.

More to come

sl + trialstop = profitable system

As far as i'm concerned, position sizing and trailing stop/partial take profit is a no brainer.

What i would like to see a bit of discussion on is the rate at which one increases position size relative to account growth. Currently I compound my position size on a trade by trade basis - as a fixed percentage of my account equity.

What this means however, if you are getting an average R/R of 1:1 (or thereabouts) and have been having a good streak of winners, the first loss you take will be greater than any recent gains.

This wont really affect the profitablility of the system long term (as long as your hit rate is solid) but will look ugly on your equity curve short term, and will have psychological implications for the less-than-pro traders out there (like me!).

So i was thinking maybe taking a less aggressive approach - and keeping the position size as a fixed percentage of the account balance seen on market open, Monday morning, and keeping this account balance as the watermark for calculating your position size.

So if your net asset value is 10k at the beginning of the trading week, your position size (at 2% risk, for example) will risk $200 relative to your stop size.
At the end of the week, if the account balance is 12k, you still only position size 2% of 10k per trade.

At the beginning of the next week, your start off taking trades with a position size of 2% of 12k (the updated equity value of the account).

Im thinking this is a more sensible way to manage my risk. I good compromise between compounding and minimising risk of trying to go too fast too soon and blowing out the curve.

Cheers,
MM

Choose the amount you are willing to risk of your account per trade. (Generally 1-2.5%) Choose your stop loss. Make the total loss equivalent to the maximum account percentage loss so if your stop loss gets hit you will lose 1-2.5%.

simple

max

Man this thread is lousy.

I suggest flipping money management on its head and examining all possibilities.... it will take several weeks and lots of thinking.... but there are only so many things you can do, so it is exhaustable.

At the end of the day, there is no right answer because everyone has a different risk tolerance. At least you can know your risk before you execute your first trade.

Ill tell you what i do. I take more risk than most. I risk 5% on the trade. On entry i set a limit order to cut half at 10 pips (GBPUSD, USDJPY etc) or 15 pips (GBPJPY, GBPCHF) and trail my stop to give myself a free shot at the trend with a solid position size. This works if you trade with the trend and have a solid system for timing entries.

Timing exits in the second half of the position is the trickiest.

EDIT: to make this clear - i dont trail my stop to break even. I trail my stop t 10 points on the other side of my entry (if ive cut half at 10 points profit) of 15 on GBPJPY etc. So worst case is stopped out at no net cost for the trade (barring interest calculations).

Discretion is used ont he second half to make sure you get some solid account growth.