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My first attempt at Money Management

  • #1
  • First Post: Oct 28, 2005 9:02am Oct 28, 2005 9:02am
Hello guys, I'd like to ask for some feedback to Fiji Trader, Diallist and other experts in Money Managment.

I have elaborated a very simple Excel file that I fill in before every trade in order to know how many lots should I position in that specific trade. It has the following fields:

- Account Balance: let's say 10k US
- Risk per trade: I have it at 3%
- US$ per pip: this depends on what currency I am looking into (EURUSD 10 $ per pip, USDCAD 8.50 $ per pip, CHF is around 7.70 $ per pip, etc, GBPUSD 10$ per pip, etc)
- Stop Loss size: here I input how long is my stop loss in pips.

Well, finally, I have Excel to calculare a small formula to tell me, according to the stop loss for this trade and the pips per $ of this specific currency, what lot size should I trade in order to, should my stop loss being hit, I will not lose more than a 3% of the account balance.

For example, if I am trading EURUSD (10 $ per pip), my stop loss for this trade is 30 pips, and my account balance at this time is 10k, then the system will tell me to trade exactly one lot. If, for the same scenario, the stop loss is 15 pips, I can trade 2 lots and still I wouldnt risk more than a 3% of the account. Conversly, if the stop loss is 60 pips, then I will trade only 0.5 lots, etc.

What do you guys think of this? it's basically a system that tells me how many lots do I trade in order to risk a FIXED 3% of my account at every trade.

Thank you!
  • #2
  • Oct 28, 2005 9:14am Oct 28, 2005 9:14am
Quoting WTB
Hello guys, I'd like to ask for some feedback to Fiji Trader, Diallist and other experts in Money Managment.

I have elaborated a very simple Excel file that I fill in before every trade in order to know how many lots should I position in that specific trade. It has the following fields:

- Account Balance: let's say 10k US
- Risk per trade: I have it at 3%
- US$ per pip: this depends on what currency I am looking into (EURUSD 10 $ per pip, USDCAD 8.50 $ per pip, CHF is around 7.70 $ per pip, etc, GBPUSD 10$ per pip, etc)
- Stop Loss size: here I input how long is my stop loss in pips.

Well, finally, I have Excel to calculare a small formula to tell me, according to the stop loss for this trade and the pips per $ of this specific currency, what lot size should I trade in order to, should my stop loss being hit, I will not lose more than a 3% of the account balance.

For example, if I am trading EURUSD (10 $ per pip), my stop loss for this trade is 30 pips, and my account balance at this time is 10k, then the system will tell me to trade exactly one lot. If, for the same scenario, the stop loss is 15 pips, I can trade 2 lots and still I wouldnt risk more than a 3% of the account. Conversly, if the stop loss is 60 pips, then I will trade only 0.5 lots, etc.

What do you guys think of this? it's basically a system that tells me how many lots do I trade in order to risk a FIXED 3% of my account at every trade.

Thank you!
Looks correct to me. Just remember to let your stops be the controlling element that drives everything else. In other words, ensure your stop makes sense based on the technicals for the trade you are entering, and resist the temptation to make it smaller just to increase your leverage. You might want to add a column to the spreadsheet that shows the true leverage for each trade so you can monitor it and keep it within your tolerance limits. If it outside your comfort zone, then reduce it by decreasing your percent risk, and not by increasing your stop.

True Leverage = Position Size / Account Balance.

Dial
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  • #3
  • Oct 28, 2005 9:20am Oct 28, 2005 9:20am
Quoting ElectricSavant
incorporate into that a target 3* the amount of the stop...


then...

look at your chart and find Suppport and Resistence...Pivots...Fibs...etc...

then...

ask yourself, does this trade make sense? (can I fit my 1:3 risk to benefit ratio into this picture frame?)


keep it simple...gawd can you believe I posted that?

Michael B.

The other guys know more about this than I do...
Great idea Michael!
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  • #4
  • Oct 28, 2005 10:16am Oct 28, 2005 10:16am
Thanks for the replies. I have two questions thought:

- Diallist: what do you mean by "true leverage"?
- Electric Savant: so you wouldn't recommend any trade with a less than a 3:1 ratio? to be honest, I can seldomly find those. Most of the trades I find are 2:1'ish.

Thank you!


PS: Yes Diallist, I never alter my stop loss in order to have a higher lot size. That is something I am always careful to respect.
  • #5
  • Oct 28, 2005 11:18am Oct 28, 2005 11:18am
Quoting WTB
Thanks for the replies. I have two questions thought:

- Diallist: what do you mean by "true leverage"?
- Electric Savant: so you wouldn't recommend any trade with a less than a 3:1 ratio? to be honest, I can seldomly find those. Most of the trades I find are 2:1'ish.

Thank you!


PS: Yes Diallist, I never alter my stop loss in order to have a higher lot size. That is something I am always careful to respect.
True Leverage is a term I picked up from reading "Bird Watching in Lion Country". I use the term to differentiate from Leverage which to me is the leverage offered by your broker. For example, if your account is set to 100:1 leverage by your broker, that represents the maximum leverage available to you. But, you don't have to use that, and you shouldn't. You can set your true leverage to any level you like below 100:1 simply by decreasing your position size relative to your account size, or increasing your account size relative to your position size.

In the example you gave in your post of risking 3% of $10,000, which allows you a position size of 1 mini lot, your true leverage would be

True Leverage = Position Size / Account Size
= 10,000 / $10,000 = 1 which is 1:1 leverage.

Dial
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
  • #6
  • Edited 4:55am Oct 29, 2005 2:58am | Edited 4:55am
Quoting WTB
Hello guys, I'd like to ask for some feedback to Fiji Trader, Diallist and other experts in Money Managment.

I have elaborated a very simple Excel file that I fill in before every trade in order to know how many lots should I position in that specific trade. It has the following fields:

- Account Balance: let's say 10k US
- Risk per trade: I have it at 3%
- US$ per pip: this depends on what currency I am looking into (EURUSD 10 $ per pip, USDCAD 8.50 $ per pip, CHF is around 7.70 $ per pip, etc, GBPUSD 10$ per pip, etc)
- Stop Loss size: here I input how long is my stop loss in pips.

Well, finally, I have Excel to calculare a small formula to tell me, according to the stop loss for this trade and the pips per $ of this specific currency, what lot size should I trade in order to, should my stop loss being hit, I will not lose more than a 3% of the account balance.

For example, if I am trading EURUSD (10 $ per pip), my stop loss for this trade is 30 pips, and my account balance at this time is 10k, then the system will tell me to trade exactly one lot. If, for the same scenario, the stop loss is 15 pips, I can trade 2 lots and still I wouldnt risk more than a 3% of the account. Conversly, if the stop loss is 60 pips, then I will trade only 0.5 lots, etc.

What do you guys think of this? it's basically a system that tells me how many lots do I trade in order to risk a FIXED 3% of my account at every trade.

Thank you!
I think some important information is missing like how much history you have. How frequent are your trades? How big are historical drawdowns? How long have you been trading this system? How much trading experience with a live account do you have? Is your system mechanical or discretional. If so how much discretion? What is your win/loss ratio? How much of a drawdown can you stomach and for how long? Why do I ask all these questions? 3 percent is a number that would normally be chosen in light of a number of issues. Perhaps you are not looking for comments about the amout of risk per trade in which case none of this matters.

FT

PS. Dial I was using the term "true leverage" on this forum before that book was even written.
  • #7
  • Oct 29, 2005 5:42am Oct 29, 2005 5:42am
Quoting fijitrader
I think some important information is missing like how much history you have. How frequent are your trades? How big are historical drawdowns? How long have you been trading this system? How much trading experience with a live account do you have? Is your system mechanical or discretional. If so how much discretion? What is your win/loss ratio? How much of a drawdown can you stomach and for how long? Why do I ask all these questions? 3 percent is a number that would normally be chosen in light of a number of issues. Perhaps you are not looking for comments about the amout of risk per trade in which case none of this matters.

FT

PS. Dial I was using the term "true leverage" on this forum before that book was even written.
FijiTrader,

Thank you kindly for the feedback.

I have chosen the 3% figure because, quite frankly, I just read in a book that I shouldnt risk more than 1 to 5% of my account, so I chose the middle number

As far as all the rest of information you advice me putting in, I definitely understand that it is important, I have another Excel file with my Historical trades where I fill in my win/loss ration, my average win and my average loss, etc. But I was more of looking feedback on my criteria to decide the lot size to be trade (aka that fixed 3%). Do you reckon I should somehow link my Historical info to that % figure? and if so, how?


Thank you again.
  • #8
  • Oct 29, 2005 5:49am Oct 29, 2005 5:49am
Quoting diallist
True Leverage is a term I picked up from reading "Bird Watching in Lion Country"... In the example you gave in your post of risking 3% of $10,000, which allows you a position size of 1 mini lot, your true leverage would be

True Leverage = Position Size / Account Size
= 10,000 / $10,000 = 1 which is 1:1 leverage.

Dial
Please correct me if I am mistaken but, in my example, on a 10k account, a 3% risk and a, say, 30 pips stop loss, that allows me to trade a size of 1 full lot, which would mean a True Leverage of 100,000/$10,000 = 10, so I guess I am trading under a 10:1 leverage.

Is that correct? Thanks!
  • #9
  • Oct 30, 2005 3:05am Oct 30, 2005 3:05am
Quoting WTB
Please correct me if I am mistaken but, in my example, on a 10k account, a 3% risk and a, say, 30 pips stop loss, that allows me to trade a size of 1 full lot, which would mean a True Leverage of 100,000/$10,000 = 10, so I guess I am trading under a 10:1 leverage.

Is that correct? Thanks!
You are correct. I was assuming mini lots at $1 per pip. I looked at your post again and saw your reference to $10 per pip, which of course means standard lots. However, with only $10,000 in your account you are better off trading micro lots to give you finer control over your position sizes and minimize the adverse affects of asymmetrical leverage.

1 standard lot = 10 mini lots = 100 micro lots = $100,000

any of which on a $10,000 account would give you 10:1 leverage as you said.

Someone is probably going to ask what asymmetrical leverage is. I understand it, but have never figured out a concise and simple way of explaining it. I learned about it from Fiji, who was able to provide a concise & simple explanation. Perhaps if anyone asks, Fiji might be so kind as to jump in with an answer?

Dial
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  • #10
  • Oct 30, 2005 3:09am Oct 30, 2005 3:09am
Quoting fijitrader
PS. Dial I was using the term "true leverage" on this forum before that book was even written.
Yes, but the first time I saw it was in the book. Only afterwards did I note your use of the term.
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  • #11
  • Oct 31, 2005 10:02pm Oct 31, 2005 10:02pm
Quoting WTB
FijiTrader,

Thank you kindly for the feedback.

I have chosen the 3% figure because, quite frankly, I just read in a book that I shouldnt risk more than 1 to 5% of my account, so I chose the middle number

As far as all the rest of information you advice me putting in, I definitely understand that it is important, I have another Excel file with my Historical trades where I fill in my win/loss ration, my average win and my average loss, etc. But I was more of looking feedback on my criteria to decide the lot size to be trade (aka that fixed 3%). Do you reckon I should somehow link my Historical info to that % figure? and if so, how?


Thank you again.
I could write a book about this but to keep it as simple as possible I'll just suggest the following:

Unless you have a high win/loss ratio (better than 50 percent) and small stops (like 30 pips or less) your drawdowns without money management applied will probably be in the range of 25 to 30 percent from an equity high. That means when you apply compounding your drawdowns and run ups will probably be even more exaggerated as your account grows. 3 percent is high (IMO) for a lot (possibly most) of trading systems but not outrageous for some. A good discretionary trader can often get win/loss ratios of 60 to 70 percent. (I've seen them much higher). However the majority of successful discretionary traders are going to be right about 1/2 the time. A lot of mechanical systems run less than 50 percent and therefore risk should be as low as 1 percent with a maximum of 2. Also it is much easier to ride a dubious individual trade with lower risk and also you can give your trades more breathing room if you get stopped out of good trades too frequently.

Does this help?

FT
  • #12
  • Nov 1, 2005 3:18am Nov 1, 2005 3:18am
Hmmmm I think I begin to understand. So you reckon that, firstly, I should figure out my consistant win/loss ration and then alter my risk% according to that win/loss ration, lowering it if the ratio is 50% or less.

Did I get it right?

Thanks!
  • #13
  • Edited 4:26am Nov 1, 2005 4:19am | Edited 4:26am
Quoting WTB
Hmmmm I think I begin to understand. So you reckon that, firstly, I should figure out my consistant win/loss ration and then alter my risk% according to that win/loss ration, lowering it if the ratio is 50% or less.

Did I get it right?

Thanks!
You're on the right track. What I'd do first is try to get the largest drawdown to less than 30 percent. In fact initially, in consideration of all the factors previously mentioned (including your win/loss ratio). Having done that I'd arrive at a percentage that would attempt to keep my worst drawdowns less than 20 percent.

Then I'd trade the system for a few months with a constant risk that should prevent anything more than a 20 percent dd. If after a few months I did not experience a 20 percent drawdown I'd review to see if I wanted to increase risk slightly, maybe 1/2 percent, obviously it would depend on whether I wanted more risk or if I noticed that, given my risk level I was nowhere near pushing my limits emotionally during any given trade or drawdown. I do not recommend pushing your limits because you allow nothing for surprises which will push you past your limit into emotional decision making and large losses.

If you are bored with trading do not be too quick to conclude that your risk is too low. In fact boredom is often a good indicator that you may be in the best zone. You really don't want to get your emotional thrills from trading. There are better ways. Compounding will get you there. Adding more funds to your account will get you more profit. Increasing leverage too high will usually make things more volatile and your income unstable.

The most important thing about increasing leverage is being able to deal with the emotional aspect of losses. Lose too much and it takes a lot longer to get yourself back to normal trading and you lose more than just your money. You also lose confidence and good judgment which leads to further losing and slower recovery. Better to start with a low percentage and find out after a few months that you should increase than to start at a level that requires the market to show you it is too high a percentage to trade.

FT
  • #14
  • Nov 2, 2005 5:15pm Nov 2, 2005 5:15pm
Hello Fiji,

Thanks for the answer. When you mention I should first try to find out what my maximum drawdown is, what exactly do you mean? I mean, I already lock out my maximum loss to a 3% per trade. You mean how many losing trades in a row I can possibly have?

Thanks!
  • #15
  • Nov 8, 2020 10:43pm Nov 8, 2020 10:43pm
Nice
Hard Work, Never Loss
  • #16
  • Nov 12, 2020 5:37am Nov 12, 2020 5:37am
It looks pretty good to me. You can keep your focus on the leverage and monitor it carefully. Try to keep it simple.
  • #17
  • Dec 1, 2020 2:28am Dec 1, 2020 2:28am
Can anybody please explain how a fixed stop loss will ever let you grow as a trader. Trading is all about risking right, and if done calculatively, risks are not necessarily bad.
  • #18
  • Last Post: Dec 14, 2020 6:15am Dec 14, 2020 6:15am
This is the right way to go in my opinion. Analyzing before making a trade is great and this even gives you a good idea about what might happen.
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