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Money Management Strategies Thread

  • #1
  • First Post: Feb 13, 2007 10:45am Feb 13, 2007 10:45am
Post your MM strategy here. I feel we have lots of threads on trading systems and psychology, but not too much on how to handle your money while trading. Let it rip!
  • #2
  • Feb 13, 2007 10:50am Feb 13, 2007 10:50am
Account balance X .03% / stop loss size = amount of lots I enter.
  • #3
  • Feb 13, 2007 10:54am Feb 13, 2007 10:54am
my money management is as follow:

My system is based on entering multiple positions on a winning trade.

My intial risk can be 2% or 1% depending on the setup, but nothing more.

I would define the maximum stop loss I can have based on the 10 day range, and calculate my lots based on that s/l and the % risk I am taking.

Once i figure out my trading lots, I try to see if i can minimize my s/l (risk) by looking at weekly highs/lows. I borrow this idea from Steviet!. I thought that it was brilliant to have an adjustable s/l whenever you can.

So if i see a weekly lines below my stop loss, I would take the average between the maximum s/l and the weekly line. thus what you have is a s/l between the two, but it will most of the time be less than the original 1% or 2% risked. So losses are further reduced. This also steer me away from intraday noise that usually seem to take my s/l out. Very frustrating!

The addition of position is when prices break the weekly lines again. I add 1% to any 2% intial position to a trade ( I don't add to 1% original risk trade). I use the same s/l method above for the new position. If the original s/l of the previous position is moved to this new s/l and the original position is in profit, I add the position. But if the original position is not in profit after adding this position, I do not add this position. Basically I add positions when I can lock in profits on the original position. And since my added postion is always less in terms of percent, i assure that my added position wouldn't erase my original profit...
  • #4
  • Feb 13, 2007 12:28pm Feb 13, 2007 12:28pm
you need more then just random risk percentages. you need to know how much your system can stand (and how much you can stand)

I keep a running average of my last 100 trades (as systems do change)

you need your winrate and your payrate (profit loss ratio). from there you can do basic fixed fractional betting plan. there are others that work better but this is a standard.

Example
if in 100 trades 40 were correct and the average gain on those trades were 22 pips and the average loss of the 60 incorrect trades were 13 pips then we have:

40% winrate
1.69 payrate (22/13)

from there you can figure out your kelly
Kelly % = winrate – [(1 – winrate) / payrate ]
Kelly % = 0.40 - [(1-0.40)/1.69]
Kelly % = 4.497

course after that you need to find your streaks and drawdowns and risk of ruin and settle at a betsize you are confortable with. usually kelly/3 works out pretty well for this.

for this system at first glance using fixed fractional i would risk 1.499% (4.497/3)

A real life example
i have been forward live testing pipboxer with 0.01$ pips for about 2 months now. so far i only have 33 trades so its not complete yet, but here are the stats

total trades: 33
wining trades: 21
average pips in win: 41.71
avarage pips in loss: 58.91

winrate: 63.63%
payrate: 0.71

Kelly % = winrate – [(1 – winrate) / payrate ]
Kelly % = 0.6363 - [(1-0.6363)/0.71]
Kelly % = 12.4%
Kelly/3 = 4.13%

initial post example
winrate: 95%
payrate: 1.00 (assuming)

Kelly % = winrate – [(1 – winrate) / payrate ]
Kelly % = 0.95- [(1-0.95)/1.00]
Kelly % = 90%
Kelly/3 = 30%

i wouldnt bet 30% even on that system, dont think i would like the 3 loss streak lol.


just risking 1% or 2% because that is a random number you picked can break your bankroll or put you on the freeway to nebraska at 10mph. your system should tell you your betsize, dont just make it up . there are several better MMs that you can use that work better and take into account streaks, drawdowns and chance of wiping out your account, saving money, distributions ect, but kelly is always a good starting
  • #5
  • Feb 13, 2007 1:38pm Feb 13, 2007 1:38pm
Quoting witchazel
you need more then just random risk percentages. you need to know how much your system can stand (and how much you can stand)

I keep a running average of my last 100 trades (as systems do change)

you need your winrate and your payrate (profit loss ratio). from there you can do basic fixed fractional betting plan. there are others that work better but this is a standard.

Example
if in 100 trades 40 were correct and the average gain on those trades were 22 pips and the average loss of the 60 incorrect trades were 13 pips then we have:

40% winrate
1.69 payrate (22/13)

from there you can figure out your kelly
Kelly % = winrate – [(1 – winrate) / payrate ]
Kelly % = 0.40 - [(1-0.40)/1.69]
Kelly % = 4.497

course after that you need to find your streaks and drawdowns and risk of ruin and settle at a betsize you are confortable with. usually kelly/3 works out pretty well for this.

for this system at first glance using fixed fractional i would risk 1.499% (4.497/3)

A real life example
i have been forward live testing pipboxer with 0.01$ pips for about 2 months now. so far i only have 33 trades so its not complete yet, but here are the stats

total trades: 33
wining trades: 21
average pips in win: 41.71
avarage pips in loss: 58.91

winrate: 63.63%
payrate: 0.71

Kelly % = winrate – [(1 – winrate) / payrate ]
Kelly % = 0.6363 - [(1-0.6363)/0.71]
Kelly % = 12.4%
Kelly/3 = 4.13%

initial post example
winrate: 95%
payrate: 1.00 (assuming)

Kelly % = winrate – [(1 – winrate) / payrate ]
Kelly % = 0.95- [(1-0.95)/1.00]
Kelly % = 90%
Kelly/3 = 30%

i wouldnt bet 30% even on that system, dont think i would like the 3 loss streak lol.


just risking 1% or 2% because that is a random number you picked can break your bankroll or put you on the freeway to nebraska at 10mph. your system should tell you your betsize, dont just make it up . there are several better MMs that you can use that work better and take into account streaks, drawdowns and chance of wiping out your account, saving money, distributions ect, but kelly is always a good starting
quite honestly, the reason I chose 1-2% is because from what I read both here and the books. Although I do pick 1-2% fixed risk, the actual risk might be lower because I put my s/l lower than the 1-2% risk. And also, I cannot handle the huge drawdowns from Kelly % that I read about.
  • #6
  • Feb 13, 2007 1:47pm Feb 13, 2007 1:47pm
i do believe what 'trading in the zone' said that each trade is a unique occurance tha doesn't relate to the past. If your system show's a 50% win rate, and you have lost 50 trades in a row. There's no guarantee that the next trade is a winner. That's also why i keep it to 2% maximum
  • #7
  • Feb 13, 2007 4:20pm Feb 13, 2007 4:20pm
i wasnt encouraging you to bet more, i was encouraging you to prove your system could handle a 2%. if you take you last 100 trades stats ( if you dont have 100 trades you shouldn't be live)

payrate = total amount won/total amount lost
winrate = % of trades that win.
profit factor = payrate * (winrate/(1-winrate) )

if your profit factor is not greater then 1.1 you can't even trade it, you will lose money in the long run. If you system comes out to 1.2 then you are safe to use that 2% number.

Quote
i do believe what 'trading in the zone' said that each trade is a unique occurance tha doesn't relate to the past. If your system show's a 50% win rate, and you have lost 50 trades in a row. There's no guarantee that the next trade is a winner. That's also why i keep it to 2% maximum

also if you believe that the past has no revelance on the future there isn't a reason to have a system, it would mean everything is random and you are just hoping to get lucky.
  • #8
  • Feb 13, 2007 5:49pm Feb 13, 2007 5:49pm
  •  Trader#0000
  • | Status: Unregistered Trader
I manage my risk by controling my position size:

position = (a x r)/|(p-s)|

where:

a = account size
r = max risk
p = entry price
s = stop price

If I am stopped out I will have lost no more then 'r'.

I am quickly learning however that I will be doomed to fail if I don't add to winning positions, so I am experementing with the best way to determine when to add and how much to add. So far I am thinking stick to the same method of position sizing.

Happy to hear anybody's thoughts/suggestions.
  • #9
  • Feb 14, 2007 5:37am Feb 14, 2007 5:37am
I have found that discretional MM can also have a positive effect on performance during a trade(position management). Many times a set and forget method of placing tps and sls, although having a positive expected value, can have adverse intratrade drawdowns. partial tps if structured properly can give some very exceptional results that standard testing will not show. Many times a standard test will show partial tps as having a lower net P&L and also a lower drawdown. Nevertheless, this lower net P&L is under the assumption of a constant leverage factor. Taking partial tps at key levels will do a few things for you, assuming you have a well structured strayegy.

Many times, a player on the daily timeframe will use his strategy in a set and forget methodology with a stop loss based on factor of ATR, S&R, fibs, etc within his MM parameters. There maybe some key shorter term reversal areas within these parameters. These areas are not usually looked at as it is not worth losing the posibility of an extra 100 pips to make an extra 30-40 pips, after all it is just a small reaction. I have found that if structured properly though, these areas for taking partial profits will accomplish a few things. First - a hard move against you and you increase profits by diminishing drawdown. Second - if you treat this partial profit as some sort of counter trade with a tight SL - you will reenter in original direction if price continues at a minimum cost. Lastly, once a swing low is established from this shorter timeframe move, you can reenter in the original direction more agressively with added leverage and use the most recent swing low as your total exit on whole position. In the context of the entire trade, because of the trail of sl - you will still be within the parameters of your MM strategy, but have increased gearing on whole position maximizing gains if your orginial tp is met. Benefit is overall equal to higher net P&L with smaller overall drawdown.

I have completely simplified this method here, but with some structuring and strategy implementation you can find a nice edge in this type of method.
Man who scratches ass should not bite fingernails
  • #10
  • Feb 14, 2007 5:51am Feb 14, 2007 5:51am
Great thread...does anyone use a spreadsheet or anything at all for their money management?

I'm trying to figure out the best approach for goal setting and managing my trades somehow.

Any feedback would be much appreciated.

Thanks..

Marc
  • #11
  • Feb 14, 2007 6:27am Feb 14, 2007 6:27am
Quoting marcf
Great thread...does anyone use a spreadsheet or anything at all for their money management?

I'm trying to figure out the best approach for goal setting and managing my trades somehow.

Any feedback would be much appreciated.

Thanks..

Marc
You can use excel - as far as goal setting, you need to let the goals set themselves up unless you have available whatever amount of capital you need. If that happens to be the case, goal setting is pretty arbitrary.
I am assuming that by goal setting you are referring to a P&L goal.

You need a realistic estimate for expected value and drawdown, etc. From there, based on whatever yearly goal you have for yourself, you can figure out the required capital necessary to attain the goal and keep you within your MM parameters. If not, then your goal will simply be to execute the plan and achieve your profit % regardless of account size - which is really your goal anyway.

Then you can begin to build on your MM strategies as you gain more reliable feedback on your trades that will allow you to exploit market inefficiencies and maximize your net P&L while reducing drawdown all the while keeping to your original plan.

Take it as a poker lesson as well, if you have JJ and the flop comes out Q,J,9, you have a good hand, but K10 will beat you, as will other hands. You make your bet and are awaiting the turn - the turn comes in a 10 and now you may be beat by the straight. in trading, this may mean take a partial profit as a strong barrier may have been met - however the price is cheap to see one more card as you have a trailing stop that will still get you out at profit. Price retraces and forms a nice pivot before hitting your trailing stop, also happened at a key level- this is like getting your full house on the river. Great hand, load up on leverage and maximize the ride.

I dont know if this is the best of examples, my point is that there are tools you are allowed to use to vary your bet size according to market action. I wouldn't use these sporadically and randomly, but with some observation you can build a Position Management strategy that fits within your MM parameters, just as in poker. If it was just about hitting long term profit objectives with a fixed stop loss, well then there are other tools you can use with non vanilla options, etc that may be more beneficial than just trading spot and with smaller premiums.

Liquidity in this market gives us alot of flexibility - this flexibility should be used to give you an additional edge, after all, it is exercising all of these little tiny edges that give us consistent returns.
Man who scratches ass should not bite fingernails
  • #12
  • May 15, 2007 8:21pm May 15, 2007 8:21pm
position size : mostly about 1 cent a pip per position
margin lv : 1500 % - 7000 %
risk : all of it

arrangement :
keep the margin lv on 2000 % - 3000 %, take loss / hedge as necessary to keep it up,
use margin lv on 12.000 % as "no risk" positioning
  • #13
  • May 15, 2007 8:32pm May 15, 2007 8:32pm
Quoting hilmy83
Post your MM strategy here. I feel we have lots of threads on trading systems and psychology, but not too much on how to handle your money while trading. Let it rip!
What got me off the ground {decades ago while trading Comm Fut's} was my 30/8 Rule.

No more than 30% of total account exposed to Margin.
No more than 8% of the 30% exposed to any individual market.
Ocassionaly very restrictive but hey, I'm still playing.
hth.

btw. I'm not sure, but I think the 30/8 rule is my own personal conception. It's been so long I don't remember.
  • #14
  • May 16, 2007 8:12am May 16, 2007 8:12am
I've been doing monte carlo analysis on my trades with various money management mthods. and I've realised that the traditional fixed percentage method wasn't really for me. as my capital increasese, I'd like my risk to get smaller.

suppose your system's largest drawdown is 50%, you might be able to stomach a losing streak of 16 losses to the amount of $5,000, if your capital is only $10,000. but if you've worked hard to bring your account to more than $100,000, will you be able to see it go down in half? even though you know that it's happened before and you'll eventually recover, the stress will still be very hard to bear. if you think $100,000 is not a big deal? what about $1,000,000?

therefore I chose a method that enables me to take more risk while my capital is small, and gradually reduces its exposure as it grows. it's profit-based and quite simple.

suppose you've a $10,000 account, and you trade 1 standard lot. you decide that you'll only increase your trading size if you've a $5,000 profit. this $5,000 is your profit base. see following table for more details:

Nr. of Lots Total Profit Equity Account Risk (with a 100 pip SL)
1 0 10,000 10%
2 1*5,000 15,000 13.3%
3 3*5,000 25,000 12%
4 6*5,000 40,000 10%
5 10*5,000 60,000 8.3%
6 15*5,000 85,000 7%
7 21*5,000 115,000 6%
8 28*5,000 150,000 5.3%
9 36*5,000 190,000 4.7%
10 45*5,000 235,000

there is actually a formula for this, but I've found that it's a lot easier to just build a table like this and check every time when you've a profit whether or not it's time to increase your trading.
  • #15
  • May 16, 2007 9:03am May 16, 2007 9:03am
Quoting iPlayGames
I've been doing monte carlo analysis on my trades with various money management mthods. and I've realised that the traditional fixed percentage method wasn't really for me. as my capital increasese, I'd like my risk to get smaller.

suppose your system's largest drawdown is 50%, you might be able to stomach a losing streak of 16 losses to the amount of $5,000, if your capital is only $10,000. but if you've worked hard to bring your account to more than $100,000, will you be able to see it go down in half? even though you know that it's happened before and you'll eventually recover, the stress will still be very hard to bear. if you think $100,000 is not a big deal? what about $1,000,000?

therefore I chose a method that enables me to take more risk while my capital is small, and gradually reduces its exposure as it grows. it's profit-based and quite simple.

suppose you've a $10,000 account, and you trade 1 standard lot. you decide that you'll only increase your trading size if you've a $5,000 profit. this $5,000 is your profit base. see following table for more details:

Nr. of Lots Total Profit Equity Account Risk (with a 100 pip SL)
1 0 10,000 10%
2 1*5,000 15,000 13.3%
3 3*5,000 25,000 12%
4 6*5,000 40,000 10%
5 10*5,000 60,000 8.3%
6 15*5,000 85,000 7%
7 21*5,000 115,000 6%
8 28*5,000 150,000 5.3%
9 36*5,000 190,000 4.7%
10 45*5,000 235,000

there is actually a formula for this, but I've found that it's a lot easier to just build a table like this and check every time when you've a profit whether or not it's time to increase your trading.
There was some paper about this; from some place like Sweden or Norway.. That covered this. I have it somewhere in my halls of forex docs.. That said, it really is just much easier to make it on excel..

I however want to press upon you that when your money is "big" it is the time to let it hatch more eggs for you. And so while decreasing the % seems prudent, I'm not sure if that's prudent for long term goals.. debatable but definitely not good if your system is consistent and your goal is to accumulate as many digits to the left of the decimal.
google:
  • #16
  • May 16, 2007 6:33pm May 16, 2007 6:33pm
Quoting twoblink
There was some paper about this; from some place like Sweden or Norway.. That covered this. I have it somewhere in my halls of forex docs.. That said, it really is just much easier to make it on excel..

I however want to press upon you that when your money is "big" it is the time to let it hatch more eggs for you. And so while decreasing the % seems prudent, I'm not sure if that's prudent for long term goals.. debatable but definitely not good if your system is consistent and your goal is to accumulate as many digits to the left of the decimal.

hello Twoblink. I agree with you that if you are sure a system is consistent then it's best not to tinker with it. however I don't have such a system yet. I have backtested systems that show wonderful profit for the past, but it ain't saying much about the future. besides, how many systems can make consistent profit when market conditions change? market conditions always change. and there is also the psychological aspect to consider. many traders can take a $5,000 drawdown, it won't give them too much stress to affect their trading decision. but how many traders can lose $500,000 without losing their sleep too? I believe it's always good to reduce your risk, especially so when your account gets larger.
  • #17
  • Aug 28, 2008 9:11am Aug 28, 2008 9:11am
Just noting down some observations about my trades:

1. Good trade usually takes off relatively fast (little retracement).

What I notice from all my losses is that winning trades usually take few sessions to achieve. The losses that I experience usually hangs around after I enter and BAM! i'm stopped for a loss. This is good to know when trying to control my risk on a trade.

2. It's important to set a stop loss BUT trader should try to reduce the loss to less than the amount originally risked.

Stop loss is your worst case scenario. It's important that once a trade is entered, you reduce your risk when price moves a little in your favor. Ultimately, when you have many losses but all of them are around -0.5R or less, you end up with slight positive edge even with only 30% winners of 1.5R profit (which is highly achievable).
  • #18
  • Aug 28, 2008 9:21am Aug 28, 2008 9:21am
i have some good things to learn from this thread.
know thy edge and abide by it ! 4 in it shall thou be successful !
  • #19
  • Aug 28, 2008 12:20pm Aug 28, 2008 12:20pm
Here is mine it's a bit of a mess if you first look at it. but it works for me

what you will get from it

  1. system accuracy
  2. average win/loss
  3. max number of positions to trade
  4. potential bar trend direction

This is a work in progress.

any suggestions you may have would be good.

cheers

Attached File(s)
File Type: xls MM DD v3.xls   414 KB | 565 downloads
  • #20
  • Last Post: Aug 28, 2008 1:34pm Aug 28, 2008 1:34pm
Basic hedge strategies

Where can I find information on hedging and managing a bad trade?
Looking for tips ideas strategies.
Now I am in a Euro/Usd hedge on a long entered at 1.5910 I hedged equal lots at 1.5500
Down about - 400 pips a small lot entry , I have a lot of margin to work with I have been trading
And just leaving the hedge sit there.
I am looking for any ideas on how I could have hedge this differently, write now I must wait till the
Euro moves back up or it may never move that far.

Should I have hedge with a higher lot than my trade entry ?
Should I have hedge with like usd/chf or gbp/usd ?
Because As of writenow l am locked in this limbo land when I placed a equal lot hedge
Are their other ideas of how I could of handles this and again I have a lot of margin and at the time I placed the hedge I had a lot of margin to work with.
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