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Money Management Strategies

  • #1
  • First Post: Edited 6:14pm May 13, 2004 3:01pm | Edited 6:14pm
Just wondering what strategies are used? I read in Beau's book about Pyramiding and I was wondering if anyone uses that strategy. It seems kind of risky? Pyraminding is trading with the same percentage of your account on each trade. Beau's book suggests 10% of your account on each trade but that seems kind of high.
  • #2
  • May 13, 2004 5:50pm May 13, 2004 5:50pm
um...the Pyramiding i know means adding contracts to your position when the market moves in your favor.

some investors even pyramid in a loosing position, which is extremely risky.

if you look at the results from last months FXCM King of the Mini winner, he/she was using Pyramiding in winning positions. i think they made over 200% in a month...
Relax and be happy.
  • #3
  • May 13, 2004 6:43pm May 13, 2004 6:43pm
What would you consider windfall profits large enough to abandon your strategy?
  • #4
  • Oct 9, 2005 12:45pm Oct 9, 2005 12:45pm
Quoting ElectricSavant
I have studied money management strategies extensively. I have concluded their most effective use comes from a consistent strategy yielding a high win/loss ratio that has a predictable string of wins and losses.

Therefore, Money management could be best matched with the trigger that causes you to enter coupled with a MAE and MFE study of that particular trigger.

Entry is the key....lack of consistency is the enemy

A reasonable Predictability of your signal, can be used with a martingale type money mangement...and in some systems an anti martingale stategy works best...

I will discuss and demonstrate a what I call a reverse martingale method together with predictable strings of losses and wins...someday when I feel for it...stay tuned...

Michael B.
Savant, i realize that you use martingale in your cash/carry strategy and it works well.

but using martingale in directional trading (were you make or lose money as the market moves in a certain direction) is the fastest way to SURE RUIN. you MUST use anti-martingale in these cases, there is no way around it. thats not my opinion, thats a mathamatical fact proven by the world's best scientists.

the problem with martingale MM strategies is that you will be wiped out by the first string of losers. and all systems will have a string of losers at some point. the traders first mission is to stay in the game, the secondary mission is to make money.
Relax and be happy.
  • #5
  • Oct 9, 2005 1:05pm Oct 9, 2005 1:05pm
mm is made out to be a lot more complicated than it needs to be. the most simple method of betting X% of your portfolio on each trade (aka %R) is usually the best. you will find that even the largest, most sophisticated institutional traders still use %R.
Relax and be happy.
  • #6
  • Oct 9, 2005 7:45pm Oct 9, 2005 7:45pm
Well, to some extent I agree with Merlin that MM is being made complicated than it should be. As simple as it gets, as better it will work, that's what I believe.

There are always 2 types of trades, high probability ones and low probability ones according to your strategy. It's just simple to use 1 lot for low probability trades and 2 for higher probability ones provided that the risk per trade stays within your acceptable range in both cases.

Making it complicated is not bad, the calculation itself might be complicated, but the concept itself must stay simple. You can take what I have just said and create a complicated implementation or a simple implementation, and most probably, they will end up almost the same results, so why bother.

Thanks,

Nader
  • #7
  • Oct 11, 2005 4:29pm Oct 11, 2005 4:29pm
as ive said, i stick to %R for MM (risk a constant percentage of portfolio on each trade). this is a simple concept that works well.

i do have one other MM strategy that i like to use. its commonly called %RP. this is where you bet a percentage % of your portfolio on each trade, PLUS a percentage of you profits.

for instance...

initial portfolio size = $100,000
current portfolio size = $120,000
current portfolio profit = $20,000
%R = 1%
%P = 1%

with plain %R, you would be risking 1% on each trade (1% of $100,000 = $1,200).

but with %RP, you would be risking $1,200 + 1% of profits (1% of 20,000 = $200). you would thus risk $1,400 on each trade.

if your account has no profit in it, %RP will act exactly like %R. its only when you show a profit that you start to risk a percentage of your profits on each trade.

this is a great way to grow your account quickly, and i generally find it better than optimalF strategies that attempt to accomplish the same feat.
Relax and be happy.
  • #8
  • Oct 11, 2005 7:14pm Oct 11, 2005 7:14pm
If I had half of the money management skills you guys are discussing, I'd be alright.
Because helping each other is a good thing.
  • #9
  • Oct 12, 2005 4:08am Oct 12, 2005 4:08am
Quoting howtotradeforex
If I had half of the money management skills you guys are discussing, I'd be alright.
just read Van Thorp's book, its MM made easy. youll get it in no time. once you learn the techniques, you will realize you shouldnt have been trading without knowing them
Relax and be happy.
  • #10
  • Oct 12, 2005 5:51am Oct 12, 2005 5:51am
Quoting merlin
using martingale in directional trading (were you make or lose money as the market moves in a certain direction) is the fastest way to SURE RUIN. you MUST use anti-martingale in these cases, there is no way around it. thats not my opinion, thats a mathamatical fact proven by the world's best scientists.
Not only that it has been proven even more conclusively by a massive string of the worlds biggest losers.

FT
  • #11
  • Oct 12, 2005 5:55am Oct 12, 2005 5:55am
Quoting merlin
mm is made out to be a lot more complicated than it needs to be. the most simple method of betting X% of your portfolio on each trade (aka %R) is usually the best. you will find that even the largest, most sophisticated institutional traders still use %R.
Provided you have the right kind of account for position size allocation to avoid asymetrical leverage issues it is about the most robust money management through the widest variety of systems and market conditions available.

Ft
  • #12
  • Oct 12, 2005 6:02am Oct 12, 2005 6:02am
Quoting merlin
as ive said, i stick to %R for MM (risk a constant percentage of portfolio on each trade). this is a simple concept that works well.

i do have one other MM strategy that i like to use. its commonly called %RP. this is where you bet a percentage % of your portfolio on each trade, PLUS a percentage of you profits.

for instance...

initial portfolio size = $100,000
current portfolio size = $120,000
current portfolio profit = $20,000
%R = 1%
%P = 1%

with plain %R, you would be risking 1% on each trade (1% of $100,000 = $1,200).

but with %RP, you would be risking $1,200 + 1% of profits (1% of 20,000 = $200). you would thus risk $1,400 on each trade.

if your account has no profit in it, %RP will act exactly like %R. its only when you show a profit that you start to risk a percentage of your profits on each trade.

this is a great way to grow your account quickly, and i generally find it better than optimalF strategies that attempt to accomplish the same feat.
I designed a spreadsheet around that exact type of system that permitted setting a different risk level for the profits and equity. I played round with it a lot and experimented with a number of scenarios. In the end I found it was easier just to increase over all (%r) position size as profits reached certain levels and that equity curve was easiest to control and more tangible that way. In the end it was a variation on a fixed ratio position sizing strategy.

FT

FT
  • #13
  • Oct 12, 2005 5:09pm Oct 12, 2005 5:09pm
Fiji,



Exactly the MM strategy that Merlin describes I use, taken from Van Tharp’s book.



I also did some work with a spreadsheet on the topic. Actually, I took a spreadsheet of yours, and adapted it for the purpose. One thing that I added, aside from the field for the additional risk% to be used on the profits and therefore determining the additional contracts traded, was a column that calculated the NEW, overall risk % of the trade.



By combining the initial risk % dollars, lets say 2%, and the risk % in dollars on the profits to be used I was able to determine how much risk each trade was risking overall, in relation to the account equity, irregardless if it was original capital or profits.



When I extrapolated my current returns out into time, I reach levels of overall risk per trade that I am uncomfortable with. Once reaching levels of 7% risk per trade or greater the swings in the account can become too big for my liking. So I decided on a manual pre-determined cap. So that when the account does reach these levels instead of truly risking let’s say 2% on initial capital and 5% of profits, if the overall risk per trade became greater then 4 or 5% per trade it would be capped there.



What I do not understand is Asymetrical leverage. I have read in some of your posts that the effects of Asym-Lev can be debilitating to a small account. I am under the understanding that an account with $25,000 or less can really be negatively effected by this, and as the account equity gets higher it becomes less of a factor. But I do not know why. I can’t figure it out.



This is an opportune time to tackle this subject because whether it effects my account or not, I would rather be in the know, and I’m sure many others will benefit from your explanation of it.



What exactly is Asymetrical leverage?

What causes it?

Why does it harm a smaller account and not a larger one?

What dynamic exists between account size, position sizing and Asym-Lev, and what can the trader do to mitigate it’s effects? Possibly by using super duper mini’s like with Oanda or FxSol for example until the account equity reaches out of it’s reach?
Who is that masked man?





Thanks. I’m looking forward to your reply.
  • #14
  • Edited 11:44pm Oct 13, 2005 4:14am | Edited 11:44pm
i know, i know. ya keep testing and testing, and you end up right back where you started > %R. when it comes to MM, simple is superior.

the only time i use the %RP is in place of an optimalf strategy. and that is not often at all.
Relax and be happy.
  • #15
  • Edited 6:17am Oct 13, 2005 6:05am | Edited 6:17am
Quote
I also did some work with a spreadsheet on the topic. Actually, I took a spreadsheet of yours, and adapted it for the purpose. One thing that I added, aside from the field for the additional risk% to be used on the profits and therefore determining the additional contracts traded, was a column that calculated the NEW, overall risk % of the trade.
LOL. One of the spreadsheets had that feature which I'd disabled before posting it because it was outside the topic I was addressing.

Quote
By combining the initial risk % dollars, lets say 2%, and the risk % in dollars on the profits to be used I was able to determine how much risk each trade was risking overall, in relation to the account equity, irregardless if it was original capital or profits.
After much research that is precisely why I'd concluded it was simpler just to adjust over all risk level as the account increased. Once I'd seen that blending the risk of proft and original equity just amounted to a sliding scale of risk I decided it didn't much matter how you go about it you just need a risk profile that reflects your system and market philosophy.

Quote
When I extrapolated my current returns out into time, I reach levels of overall risk per trade that I am uncomfortable with. Once reaching levels of 7% risk per trade or greater the swings in the account can become too big for my liking. So I decided on a manual pre-determined cap. So that when the account does reach these levels instead of truly risking let’s say 2% on initial capital and 5% of profits, if the overall risk per trade became greater then 4 or 5% per trade it would be capped there.
You have a pretty high risk tolerance. Either that or you have a pretty high win ratio.

Quote
What I do not understand is Asymetrical leverage. I have read in some of your posts that the effects of Asym-Lev can be debilitating to a small account. I am under the understanding that an account with $25,000 or less can really be negatively effected by this, and as the account equity gets higher it becomes less of a factor. But I do not know why. I can’t figure it out.
With a %risk MM system you cannot control your risk very close to the constant level of risk that you want to achieve if your position size jumps in large increments. Imagine trading 100k position size with a 25k account. If you define your risk to a constant 2 percent you can risk 500.00 which means trading one contract with 50 pip stops or two contracts with 25 pip stops. What happens if your stops should be at 30 pips? Then you can only trade 1 contract which means risk of 1.2 percent with one contract or 2.4 percent with two. In other words your leverage is either too small or too large in that scenario but when your account reaches 30k you can trade 2 contracts with 30 pip stops and have exactly 2 percent risked.

As soon as you jump from one contract to 2 your leverage doubles from when you were trading one contract. So between 25k and 30k you are risking less than 2 percent. Actually much closer to 1 percent for a good portion of the time. If your projected equity curve allows 2 percent risk you don't make nearly as much money if you are winning as you should because you are not risking 2 percent. If you are losing you will lose much less by not risking much but in a positive expectancy system with a nice distribution of wins and losses you will not be maximizing your profits. Therefore you lack a symetrical leverage and depending on how your trades work out this can help or hurt you. My research shows that it will hurt you a lot more frequently that it will help you. I've mostly found scenarios where a constant risk is more profitable than fluctuating risk.

To resolve the problem of asymetrical leverage all you need is a smaller position size in relation to your account size. With FOREX trading the best results I've found indicated that being able to initiate position sizes in 1000.00 increments was best for accounts under 20k. Often these are known as micro mini. After 20k or so graduating to a mini or 10k increments in trade size... and so on. I have not used it but FXCM has a module that permits sizing trades to an exact percentage and will correspondingly create a position size to an exact dollar amount that reflects the exact percentage. I think there is a minimum account size required.

Quote
What exactly is Asymetrical leverage?

What causes it?

Why does it harm a smaller account and not a larger one?
If your minimum position size is too large in relation to your account size the same thing will also happen to a larger account. A great example would be back when S&P contracts required 15 to 20 K of margin and there were no mini contracts. Someone trading those contracts and a %R MM approach would experience a lot of asymetrical leverage with 500k and still see its effect with accounts into the low millions.

Quote
What dynamic exists between account size, position sizing and Asym-Lev, and what can the trader do to mitigate it’s effects? Possibly by using super duper mini’s like with Oanda or FxSol for example until the account equity reaches out of it’s reach?
Right.

Quote
Who is that masked man?
Huh?

FT
  • #16
  • Oct 13, 2005 7:43am Oct 13, 2005 7:43am
PERFECT.

Thank very much for the answer.
  • #17
  • Oct 13, 2005 1:23pm Oct 13, 2005 1:23pm
fiji you edited my post! its easy to get confused between the "edit" and "quote" button
Relax and be happy.
  • #18
  • Oct 13, 2005 11:44pm Oct 13, 2005 11:44pm
Quoting merlin
i know, i know. ya keep testing and testing, and you end up right back where you started > %R. when it comes to MM, simple is superior.

the only time i use the %RP is in place of an optimalf strategy. and that is not often at all.
LOL. Right you are. Probably you use %RP (when you dust it off) because it gives you a different way to look at risk than because it is any better even in those rare cases. When you do use it most likely it is more when experimenting and testing than for your PF trading?

Personally I tried it out because someone (I think it was Van Tharpe or Williams) mentioned it in their marketing literature like it was some novel idea so I modeled it to see what it was about. At the end of the day it is an eye catching marketing idea to sell a novel twist on money management. Also it is educational to play with.

FT

Sorry Merlin problem fixed.
  • #19
  • May 9, 2019 7:15am May 9, 2019 7:15am
The common mistake of beginner traders in using the forex strategy is when they are losing (floating loss), they actually add to their position.
  • #20
  • May 26, 2024 11:46pm May 26, 2024 11:46pm
Quoting merlin
as ive said, i stick to %R for MM (risk a constant percentage of portfolio on each trade). this is a simple concept that works well. i do have one other MM strategy that i like to use. its commonly called %RP. this is where you bet a percentage % of your portfolio on each trade, PLUS a percentage of you profits. for instance... initial portfolio size = $100,000 current portfolio size = $120,000 current portfolio profit = $20,000 %R = 1% %P = 1% with plain %R, you would be risking 1% on each trade (1% of $100,000 = $1,200). but with %RP, you would...
Thanks for share
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