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Real Grail in Money Management

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  • #1
  • First Post: Mar 7, 2007 2:30pm Mar 7, 2007 2:30pm

Real Grail in Money Management


Real Grail is in our skill and practice. We must set proper relationship between risk and our concrete chance of success.
The table of excel shows us our risk, max stop etc. It is convenient for professionals.

I am ready to answer your questions if you do not mind.
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Prof Herman
  • #2
  • Mar 7, 2007 2:33pm Mar 7, 2007 2:33pm
this is more of a comment rather than question..but feel free to comment on it too.

My trading has consistently show 35-45% winning ratio, sometimes more. But I find that adding positions to winning trades, once I'm able to lock in profits really help me become profitable.

ex. recent usdjpy, i had 4 positions on it before i got stopped out for about 800 pips
  • #3
  • Mar 7, 2007 2:53pm Mar 7, 2007 2:53pm
Quoting hilmy83
... My trading has consistently show 35-45% winning ratio, sometimes more. But I find that adding positions to winning trades, once I'm able to lock in profits really help me become profitable.
ex. recent usdjpy, i had 4 positions on it before i got stopped out for about 800 pips
It is the sample table. You could use the similar one. I seldom have opened more than 1 position of the same pair.

But you can fix such position in my table (light-yellow color).

You won't view the position of same pair in equity. So you have low risk!
Prof Herman
  • #4
  • Edited 5:05pm Mar 7, 2007 4:37pm | Edited 5:05pm
Quoting hilmy83
My trading has consistently show 35-45% winning ratio, sometimes more. But I find that adding positions to winning trades, once I'm able to lock in profits really help me become profitable.
What a coincidence, this is precisely an idea I am trying to verify/backtest these days.

The goal is to discover if there is ANY mathematical advantage to be gained by adding lots to a winning position.

Let's say you are a day-trader and you always close your position before 5PM EST. Ok, you initiated a trade a 5 AM and your position is now profitable by 25 pips.

The problem is this : what do I do now? Is it profitable to add another lot (or 2 or more) at this point? What additional profits could I gain (if any !) if I keep trading (betting) that way for the next 1000 trades ?

Or is it better to do the reverse, bet 2 lots first and then sell 1 lot when the market has moved X pips in my favor ?

Or is it more profitable to just collect my 25 pips and call it a day, before the market changes its mind and steals my 25 pips ?

Or what ?

This is what I am trying to discover scientifically, no "perhaps" or "I think..." or "I believe" or "in my opinion" etc...

This is why backtesting is soooooooo important, it shows you the OPTIMUM way of making money.
  • #5
  • Mar 7, 2007 6:36pm Mar 7, 2007 6:36pm
When pyramiding trades it is always best to be heavy at the start of the trade not the end. When the trade starts to move in your favor you then add fewer and fewer lots. This way if the market does quickly reverse on you will still hold a decent profit.

If you were to do it the other way and add more weight at the end of the trade then a quick market reverse could wipe your profits out very quickly.
  • #6
  • Mar 7, 2007 7:48pm Mar 7, 2007 7:48pm
Quoting FXTerminator
What a coincidence, this is precisely an idea I am trying to verify/backtest these days.

The goal is to discover if there is ANY mathematical advantage to be gained by adding lots to a winning position.

Let's say you are a day-trader and you always close your position before 5PM EST. Ok, you initiated a trade a 5 AM and your position is now profitable by 25 pips.

The problem is this : what do I do now? Is it profitable to add another lot (or 2 or more) at this point? What additional profits could I gain (if any !) if I keep trading (betting) that way for the next 1000 trades ?

Or is it better to do the reverse, bet 2 lots first and then sell 1 lot when the market has moved X pips in my favor ?

Or is it more profitable to just collect my 25 pips and call it a day, before the market changes its mind and steals my 25 pips ?

Or what ?

This is what I am trying to discover scientifically, no "perhaps" or "I think..." or "I believe" or "in my opinion" etc...

This is why backtesting is soooooooo important, it shows you the OPTIMUM way of making money.
It's hard for me to see how daytrader can pyramid their position. Their target profits are usually too tight to add another position.

I basically daytrade (5 min charts) and swing trade ( daily charts). I only add position and hold it overnight when I suspect a swing opportunity has occured. So far it works good.
  • #7
  • Mar 7, 2007 8:16pm Mar 7, 2007 8:16pm
Quoting Markj
When pyramiding trades it is always best to be heavy at the start of the trade not the end. When the trade starts to move in your favor you then add fewer and fewer lots. This way if the market does quickly reverse on you will still hold a decent profit.
Sure, a lot of "experts" and traders keep repeating that Markj (this is called "reverse pyramiding") but where is the actual PROOF that this way of trading is superior to the other options I was talking about ??

See, this is what I am trying to see for example, through backtesting:

Option 1: Collect your 25 pips everytime, with no pyramiding, unless stopped:
+3600 pips after 1000 daytrades

Option 2: Add one lot when position is profitable by 25 pips and then keep adding one lot after each extra 25 pip move in your favor:
+1670 pips after 1000 daytrades

Option 3: Bet 2 lots first, then sell 1 lot when position profitable by 25 pips:
-700 pips (loss) after 1000 daytrades.

Then you would say : "AHA! no pyramiding at all is the BEST way to make money then!"

Most traders assume that money management is not such a big deal, but believe me it is, how you manage your trade when your position is profitable is the key and is more important than your entry point itself.

In fact you can make BILLIONS in the forex if you always know WHEN to exit a trade for maximum profit, even if your entry points are selected by a monkey!
  • #8
  • Mar 7, 2007 8:22pm Mar 7, 2007 8:22pm
Quoting Markj
When pyramiding trades it is always best to be heavy at the start of the trade not the end. When the trade starts to move in your favor you then add fewer and fewer lots. This way if the market does quickly reverse on you will still hold a decent profit.

If you were to do it the other way and add more weight at the end of the trade then a quick market reverse could wipe your profits out very quickly.
this is exactly how i do it, i don't add to positions unless profit is locked in previous positions and that all added positions are less in 'size' so that if it is stopped out, previous position never go negative, only slightly reduced..

There's this prominent japenese futures trader in Moris' candlechart book where he said adding positions is essential
  • #9
  • Mar 7, 2007 8:27pm Mar 7, 2007 8:27pm
the weekly chart determine where i add position on my daily swing trades. If i were long, i look at the recent week's high and add when daily closed above that, then look at a higher weekly high and see if i can add to taht position..

it's pretty straight forward and it's working quiet nicely
  • #10
  • Mar 7, 2007 8:30pm Mar 7, 2007 8:30pm
Quoting hilmy83
There's this prominent japenese futures trader in Moris' candlechart book where he said adding positions is essential
Out of curiosity, did he then proceed to prove his statement, Hilmy83?
  • #11
  • Mar 8, 2007 12:37am Mar 8, 2007 12:37am
Adding to a position simply because it has moved x amount of pips is not a wise approach. Do you put on your initial position that way? Why would you put on another position that way?

When adding to a trade, it is a new and separate trade. It has no connection at all to any exisiting trades. The only thing they have in common is that they are both effecting your P/L, and that's it.

If you want to "add" onto a trade, you need the same things you used to get into the first trade...a logical entry spot (according to your system), a logical exit, and money management. It's just another trade.
  • #12
  • Mar 8, 2007 5:22am Mar 8, 2007 5:22am
Averaging of a position has a psychologic meaning only. Sometimes we really need it badly.

I prefer to feel market without psychological help. I cannot help feeling that I do my work more strong without averaging. Nevertheless, everyone chooses your own way here.

Does my table really help you? I use some conceptions in the table, which I could explain carefully.
Prof Herman
  • #13
  • Edited 11:15am Mar 8, 2007 10:59am | Edited 11:15am
Quoting luqmanz
It's hard for me to see how daytrader can pyramid their position. Their target profits are usually too tight to add another position.
Well, it depends on your day-trade system.

The average daily range of the GBP/USD is always greater than 100 pips, so when you have already earned 25 pips, what do you do?

Do you just collect those 25 pips and close your position, leaving a potential additional 75 pips profit on the table?

Or is more profitable to add another lot ?

Or is better to bet 3 lots first, then sell 1 lot at 50 pips and sell the second lot at 75 pips and let the last lot ride, hoping to catch one of those big 300 pip daily move ?

Or what ?

Which option will give me MORE MONEY in the long run, if I keep trading this way or that way the next 1000 trades?

Because one of this option will definitively help you harvest much, much more pips in the long run, so we should not assume that these trading decisions have no impact on our bottom line and that they are equal.

This is what I am investigating right now, in a scientific manner, because I don't like to read comments like these " Oh I think that..." or "Oh I believe that..." in books and forums. I need facts and facts only.

Why ?

Because my money is on the line and I am not going to bet 20 lots or more on "I Think this" or "I believe that..."
  • #14
  • Mar 8, 2007 1:24pm Mar 8, 2007 1:24pm
[quote=FXTerminator;237944]Sure, a lot of "experts" and traders keep repeating that Markj (this is called "reverse pyramiding") but where is the actual PROOF that this way of trading is superior to the other options I was talking about ??
quote]

I'm actually recommending that you do not reverse pyramid.

The most profitable and most risky method would be adding all your positions at the start, followed by reverse and maximum leverage pyramiding (depending on the way you manage your risk), then inverted pyramiding (adding equal contracts) followed by your standard pyramiding.

If your trading system has a low risk (to initially get into the trade) win a risk reward of let say 1:5 or lower (for day trading) then adding all your positions at the start of a trade may be the best way to trade. If your system has a higher risk to get into the trade but once in profit normally has a much greater reward and probability to keep moving in your direction then the standard pyramiding (scaled-down or upright pyramiding) might be the way to go.

If you’re looking for an exact scientific answer I don't believe there is one. Because it's not an exact science, each trading system is unique with different logic and data. Surely each possible way of pyramiding and the best outcome will depend on your trading system, the results, probabilities, your MM and self control.




  • #15
  • Edited 2:46pm Mar 8, 2007 2:15pm | Edited 2:46pm
Quoting Markj
If you’re looking for an exact scientific answer I don't believe there is one. Because it's not an exact science, each trading system is unique with different logic and data. Surely each possible way of pyramiding and the best outcome will depend on your trading system, the results, probabilities, your MM and self control.
You are partially right Markj, it depends of course on your system.

But there are some almost universal facts I have discovered while backtesting hundred and hundred of FX systems, REGARDLESS of the logic of the system.

The first thing I wanted to prove is the now famous "Cut your loses short and let your profits run" advice so I did thousand of tests to see for myself.

And this idea is absolutely true !

Here is what I did. I took some winning day-trade forex systems to see if I can make MORE money but limiting my profits to x pips all the time.
In other words, how much money can I make if I trade system X with a 1 pip limit target ? How about 2 pips or 3 pips or 17 pips limit ? What is the optimum number of pips to set as a limit ?

Well here it is : the 135 to 155 pip range seems to be the OPTIMUM number of pips to collect before closing a day-trade position on the wild GBP/USD, the only currency I day-trade. In other words, if you are a day trader and you have already earned between 135 and 155 pips on the GBP/USD, then close immediately your position, you have already reached the optimum, there is nothing MORE to gain by staying in the trade. In fact, you are only asking for trouble if you do not close your position.

How about collecting 1 pip and closing our position? This is by far the worst thing to do, in all of my tests, it's a total losing proposition, it generates thousand pips loss all the time, even if your system is a winning system!!

Example :
Close position after 155 pip profit : +5300 pips after 1000 trades
Close position after 1 pip profit : -2900 pips after 1000 trades (minus 2900 pips!)

See the huge difference here ?


Another alternative when you are winning is to let your trade open until the "close" of the day. This is the second BEST option for a day-trader.

So yes the "let your profits run" motto is true.

Letting my profits run up to 155 pips max or until the end of the day (midnight EST for me) remains the 2 best ways I know to exit a day-trade. Closing a winning day-trade position before that does not pay in the long run, even if it is indeed very tempting to close a position after 20 or 30 pip profit.

Now i want to see for myself if it pays (or not) to add lots when winning...
  • #16
  • Mar 8, 2007 2:27pm Mar 8, 2007 2:27pm
Quoting FXTerminator
Out of curiosity, did he then proceed to prove his statement, Hilmy83?
well he didn't really prove or disapprove, it was more of an interview of what made him success..

altough I did like what the trader said.."making money is hard, unless you're the son of a king"
  • #17
  • Mar 8, 2007 2:47pm Mar 8, 2007 2:47pm
I would think you are doing very well if you can get 130 - 155 pips out of the daily cable trade. The maximum, best setting I have found is if I get to 80 pips I wait for technicals on a 5 minute for an exit. Getting out of a trade before your maximum # (150) of pips would depend on how much daily range has already passed before you enter the trade.

Keep us posted on your outcomes.

Cheers
  • #18
  • Mar 8, 2007 2:56pm Mar 8, 2007 2:56pm
Quoting FXTerminator
... The first thing I wanted to prove is the now famous "Cut your loses short and let your profits run" advice so I did thousand of tests to see for myself. ...

  1. cut your loses short. Is it perfectly universal rule? Sometimes we must give a chance to our losses to become profits. Nevetheless, I feel the first rule be very good.
  2. let your profits run. Oh, let it run! I do not want my profit runnig smaller!

:surprised e.g. I am trying to determine when the growing of my profit is hardly possible.

Prof Herman
  • #19
  • Mar 8, 2007 2:58pm Mar 8, 2007 2:58pm
Quoting Markj
I would think you are doing very well if you can get 130 - 155 pips out of the daily cable trade. The maximum, best setting I have found is if I get to 80 pips I wait for technicals on a 5 minute for an exit. Getting out of a trade before your maximum # (150) of pips would depend on how much daily range has already passed before you enter the trade.

Keep us posted on your outcomes.

Cheers
Hello again,

In most cases you will of course not reach the 135 pip or more limit every day, so in that case you simply wait for the close to exit the trade, without never limiting yourself to some fixed limit value (like the 80 pips you suggested).

In other words always let the market give you the maximum, taking "only" 5, 10, 20, 30, 50 or 80 pips or any other value not in the 135-155 pip range will only limit your total profits, in the long run, as far as day-trading is concerned.
  • #20
  • Mar 8, 2007 3:02pm Mar 8, 2007 3:02pm
Quoting Leader

  1. cut your loses short. Is it perfectly universal rule? Sometimes we must give a chance to our losses to become profits. Nevetheless, I feel the first rule be very good.
  2. let your profits run. Oh, let it run! I do not want my profit runnig smaller!

:surprised e.g. I am trying to determine when the growing of my profit is hardly possible.

Oh yes, I forgot about the "cut your loses short" bit.

Here it is : the optimum seems to be 33 pips maximum loss. Again and again, I always keep seeing that number as the optimum stoploss, regardless of the system itself. If your stoploss is really higher than that, then your day-trade system needs some fine-tuning, to say the least.
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