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Discussing MM

  • #1
  • First Post: Dec 1, 2005 7:57pm Dec 1, 2005 7:57pm
i am learing a lot about money management these days. so i thought that i should start a thread..where we can discuss, disect, analysis some money management techniques. i would like the more experienced traders to guide this thread so that we can learn something about money management. everyone is welcome to post their style of money management.

ok...here is some Fixed-ratio MM as in ryan jones book

start with an account size which is atleast 3 times larger than your expected drawdown. how is a drawdown calcualted?
1. Start with the total number of dollars in your trading account. For example
let's say it's 1000 USD.

2. Now pick how many pips profit you need to achieve before you trade with
more lots. Let's say 200 pips (10 pips/day for 20 trading days in a month
average).

3. Now start trading .1 mini lots (which is profit/loss 1 USD). You would only
increase to .2 lots after gaining 200 pips. When you gain 200 more pips profit
you would trade .3 lots etc...

4. Month 1: $1000 + (200 pips x .1 lot = $200 ) Total: $1200
Month 2: $1200 + (200 pips x .2 lots = $400) Total: $1600
Month 3: $1600 + (200 pips x .3 lots = $600) Total: $2200
Month 4: $2200 + (200 pips x .4 lots = $800) Total: $3000
.
.
.

5. if after the first month your balance falls below $1200 you are back to 1 lot. and so decrease your lot everytime you fall below the previous increment level.

this is the strategy discussed in ryan jones book..in more detail. what are the drawbacks of using this strategy? what do you guys think about this strategy? what other strategies are there which we can use or discuss?

regards
gabroo
and i grow...pip by pip.......pip by pip!!!!
  • #2
  • Edited 3:49am Dec 2, 2005 3:45am | Edited 3:49am
I am using this system of MM. Works consistantly well for me:

Risk per trade is 0.5% to 1% of my pot.

My system trades mainly Cable with a stop of between 8 to 13 in spread. So the amount I risk per pip is dependant on how many pips stop I have on a particular trade, though the total risk will not exceed 1%.

I trade off S / R levels when a various selection of indicators give me the green light. I am enter right off the previosuly tested level an 8 pip stop. If I wait for a higher low (lower high for a short) I increase the stop by the amount of pips confirmation I have received. Never more than 13.

(I take entries off 1 and 5 min charts, only with trend if trend exists on 30 min. If no trend can trade either way.)

Targets are either 13, 30, 40 or more depending on confimration on higher time frame charts.

Stop to 3 or 4 pips outside the entry point at +13. Sometimes to B/E, though as you know if their is a restest of a level the brokers can move their prices to take out the masses of stops / orders they see. So I don not see the point of racing the stop to a place were price has recently been active at, though sometimes it gives a nice feeling of no loss if you do.

1/3 of position closed at +13.

Then I move the stop, on remainder after each retrace and then the previous high (low for a short) is taken out.

On a completed calendar month 50% profit is taken out. I then base the next month's risk on the balance + the 50% left in.

If there is a losing month, I would base the next months risk per trade on the reduced level. This year no losing months.

I aim for 30 pips a day. Never lose more than 25 / 30 pips a day.

If I make 238 pips a month I and investors will be overjoyed.

If I make 100 pips a month everyone will be happy and the investors still make more than most other investments they are likely to have.

I think 1% or less is a great risk per trade level from a pyschological level. Even if I have 3/4 losers in a row, unusual, though statistically very possible over a large sample, I still feel well away from my agreed drawdown stop trading level I have with investors and myself. (30% down from the high of the acocunt).
  • #3
  • Dec 2, 2005 8:01am Dec 2, 2005 8:01am
hi hagadol,
your MM style looks interesting. so you basically increase the risk depending on your intial deposit and the profit amount. it is kind of an anti-martingale style. a few things i want to ask. you only target 20-30 pips a day. do you stop after that? if you have a loss of 10%, how much percentage profit will you need to take it back to breakeven? one more thing confuses me sometimes. people say use like 2% of your account. does that mean 2% on the entire trade(5 lots with combined risk of 2%) or 2% per lot(5 lots each with a risk of 2%....total 10% risk)?
gabroo
and i grow...pip by pip.......pip by pip!!!!
  • #4
  • Dec 2, 2005 5:32pm Dec 2, 2005 5:32pm
one more thing. i wanted to ask this question for sometime. is the effect of incresing you leverage the same as increasing your lot size?. i mean if you double your leverage the same effect can be obtained with doubling your lots? is this correct or am i missing something?

gabroo
and i grow...pip by pip.......pip by pip!!!!
  • #5
  • Dec 2, 2005 7:48pm Dec 2, 2005 7:48pm
Quoting gabroo_munda
hi hagadol,
your MM style looks interesting. so you basically increase the risk depending on your intial deposit and the profit amount. it is kind of an anti-martingale style. a few things i want to ask. you only target 20-30 pips a day. do you stop after that? if you have a loss of 10%, how much percentage profit will you need to take it back to breakeven? one more thing confuses me sometimes. people say use like 2% of your account. does that mean 2% on the entire trade(5 lots with combined risk of 2%) or 2% per lot(5 lots each with a risk of 2%....total 10% risk)?
gabroo
Lets do a quick calculation.

Float: $10,000
Risk: 2%
Risk$: $200
Stop size: 20 pips

Positionsize := $200/0.002 = $100,000.

This is 1 standard contract or 10 minis.

Simon
  • #6
  • Dec 2, 2005 11:14pm Dec 2, 2005 11:14pm
Lets say in month 1 - I start with a pot of 200,000.

1% RPT is 2000 (RPT = Risk Per Trade)

I make 20,000 in month one and take out 50% profit.

In Month 2 my RPT will be 1% of (200K + 20K - 10K)

The 50% profit is taken to pay for women and beer. Usually in the other order.

I try and get 30 pips a day. I do not stop if and when I get there. If a entry presents itself when I am working, I take it. The only time I do not take entries is if I am at -30 or I just want to stop for the day.

Key is once you have your MM plan, is just to trade and think in pips not money.

Also think in samples of trades not individual trades. I trade two systems and keep a sheet where I list each, by listing 20 trades at a time. This helps me to remember that the result of any individual trade is an insignificant statistic ina random market. However good your edge is, any one trade has a good chnace of failing.

Often overlooked is to make sure your avergage winner is bigger than your avergage loser. Otherwise you are doomed, IMHO.


Quoting gabroo_munda
hi hagadol,
your MM style looks interesting. so you basically increase the risk depending on your intial deposit and the profit amount. it is kind of an anti-martingale style. a few things i want to ask. you only target 20-30 pips a day. do you stop after that? if you have a loss of 10%, how much percentage profit will you need to take it back to breakeven? one more thing confuses me sometimes. people say use like 2% of your account. does that mean 2% on the entire trade(5 lots with combined risk of 2%) or 2% per lot(5 lots each with a risk of 2%....total 10% risk)?
gabroo
  • #7
  • Dec 3, 2005 5:25pm Dec 3, 2005 5:25pm
Quoting gabroo_munda
i am learing a lot about money management these days. so i thought that i should start a thread..where we can discuss, disect, analysis some money management techniques. i would like the more experienced traders to guide this thread so that we can learn something about money management. everyone is welcome to post their style of money management.

ok...here is some Fixed-ratio MM as in ryan jones book

start with an account size which is atleast 3 times larger than your expected drawdown. how is a drawdown calcualted?
1. Start with the total number of dollars in your trading account. For example
let's say it's 1000 USD.

2. Now pick how many pips profit you need to achieve before you trade with
more lots. Let's say 200 pips (10 pips/day for 20 trading days in a month
average).

3. Now start trading .1 mini lots (which is profit/loss 1 USD). You would only
increase to .2 lots after gaining 200 pips. When you gain 200 more pips profit
you would trade .3 lots etc...

4. Month 1: $1000 + (200 pips x .1 lot = $200 ) Total: $1200
Month 2: $1200 + (200 pips x .2 lots = $400) Total: $1600
Month 3: $1600 + (200 pips x .3 lots = $600) Total: $2200
Month 4: $2200 + (200 pips x .4 lots = $800) Total: $3000
.
.
.

5. if after the first month your balance falls below $1200 you are back to 1 lot. and so decrease your lot everytime you fall below the previous increment level.

this is the strategy discussed in ryan jones book..in more detail. what are the drawbacks of using this strategy? what do you guys think about this strategy? what other strategies are there which we can use or discuss?

regards
gabroo
Very good thread, Gabroo! Thanks for starting it!

I go into trades risking maximum 2% of my capital and 6% of my total account. Meaning, I can take up to 3 trades before reaching my maximum allowed limit, ie 2% x 3 = 6%

Profits stay in the account, and the original value is used to calculate position sizes until profits equal 25% of my starting capital. Then the profits are "added" to the position sizing calculation. I am still working on throwing away my emotion of FEAR.

Drawdown is defined as rhe peak to trough decline during a specific period. It is usually mentioned as apercentage between the peak to the trough.

Once drawdown has occured, a trader will need to gain back a greater % of profits then the drawdown. Some people think that, say, to recover from a 20% drawdown, one needs to make 20%. This is not true.

Attached is table explaining this.


Happy Trading!
Attached Image
~If you fail to plan, you plan to fail~
  • #8
  • Dec 3, 2005 7:11pm Dec 3, 2005 7:11pm
good table there gcl. that explains well why we should use less percentage of our capital for trading. Seeing this table i think risking 20% is still not as you'll only need 25% to make it back. that is not bad. but yea risking 20% is a lot. i am attching an article by van tharp. it shows different kind of MM techniques and does some introductory work on the principles of MM.

i would like to get a discussion started on the various MM techniques mentioned in there.

one thing i want to ask. although it is advised that we should always be prepared for drawdown and loosing streaks. but if i have a new system, which has been tested for 6 months, this still not gives me an clear idea of how much drawdown i should be expecting and be prepared for. how to estimate drawdown for new systems? is drawdown and your largest loosing streak the same thing? does your risk taking capability depend on your drawdown capacity? and if yes, how?

gabroo
Attached File(s)
File Type: pdf _Trading_ebook__Money_Management_Report__Van_Tharp_[1].pdf   555 KB | 3,911 downloads
and i grow...pip by pip.......pip by pip!!!!
  • #9
  • Dec 6, 2005 4:04pm Dec 6, 2005 4:04pm
One thing that dawned on me yesterday....when we calculate position sizing, we do not count the spread...so is it better to lower the lot # to account for the spread or just keep the lot #'s and treat spread as a separate entity?
~If you fail to plan, you plan to fail~
  • #10
  • Dec 6, 2005 8:25pm Dec 6, 2005 8:25pm
Quoting gcl915
One thing that dawned on me yesterday....when we calculate position sizing, we do not count the spread...so is it better to lower the lot # to account for the spread or just keep the lot #'s and treat spread as a separate entity?
What's a spread?
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  • #11
  • Dec 13, 2005 11:05am Dec 13, 2005 11:05am
Quoting diallist
What's a spread?
i don't know...what you call it...but the difference between the bid and ask price of a currency...is what i call a spread.

i posted this in moneytec...but i want your reviews on it as well. it'll help me understand something about money management.

i think leverage is a powerfull tool. mayb an example can clarify a few things..and might help me understand also.

suppose you open an account with $5000. you want to trade 1 lot (100,000) of EURUSD. to clarify leverages...we won't be using the concept of risk management..which states that never bet more than 2%-5% of your account.

using low leverage

current rate = 1.1900
leverage = 50 (this is still high according to some standards)
amount + margin needed for this trade = ((100,000 * 1.1900)/50) => $2380
5000 - 2380 = 2620 (262 pips)
so your maximum drawdown (streak of loosing trades) can be 262 pips before a margin call
risk = if your position goes -30 pips...u lose = $300 + spread

using high leverage

current rate = 1.1900
leverage = 400
amount + margin needed for this trade = ((100,000 * 1.1900)/400) = $298
5000 - 298 = $4702 (470 pips)
so your maximum drawdown (streak of loosing trades) can be 470 pips before a margin call.
risk = if your position goes -30 pips...u lose = $300 + spread

so as you can see....the risk in both cases is the same $300, but using high leverage..our buffer for loosing trades (drawdown) is larger as we have to loose 470 pips (compared to 262 pips) in order to reach bankrupcy (ofcourse we'll get bankrupt before that..because after lossing trades..we need some money for buying and margin in the account to trade further, but u get the point). so money worth 470 pips in your account is better than money worth 262 pips..as the former will keep you in the game longer.

high leverage is dangerous...if you start with $500 account and then want to trade at 400:1 leverage...because then one bad trade will wipe you out.

i might have made some mistakes in this examples as i have assumed some things..and taken account risk (2% - 5%) out of the picture. also i have assumed that money management practise does not exsist....which will suggest you too decrease your exposure in a losing streak. i might be right..or might be absolutely wrong. please correct me as you think right.

regards
and i grow...pip by pip.......pip by pip!!!!
  • #12
  • Dec 14, 2005 4:56pm Dec 14, 2005 4:56pm
yeaa..this is a sort of bump for this thread....but can somebody please respond to my post above. i really wanna get some views on it. i had a simmilar post in moneytec..in one of the threads...and everyone just skipped it and no one had a convincing answer to it. thanks.

regards
Gabroo
and i grow...pip by pip.......pip by pip!!!!
  • #13
  • Dec 15, 2005 1:58am Dec 15, 2005 1:58am
Hi,
Quoting gabroo_munda
i posted this in moneytec...but i want your reviews on it as well. it'll help me understand something about money management.

i think leverage is a powerfull tool. mayb an example can clarify a few things..and might help me understand also.

suppose you open an account with $5000. you want to trade 1 lot (100,000) of EURUSD. to clarify leverages...we won't be using the concept of risk management..which states that never bet more than 2%-5% of your account.

using low leverage

current rate = 1.1900
leverage = 50 (this is still high according to some standards)
amount + margin needed for this trade = ((100,000 * 1.1900)/50) => $2380
5000 - 2380 = 2620 (262 pips)
so your maximum drawdown (streak of loosing trades) can be 262 pips before a margin call
risk = if your position goes -30 pips...u lose = $300 + spread

using high leverage

current rate = 1.1900
leverage = 400
amount + margin needed for this trade = ((100,000 * 1.1900)/400) = $298
5000 - 298 = $4702 (470 pips)
so your maximum drawdown (streak of loosing trades) can be 470 pips before a margin call.
risk = if your position goes -30 pips...u lose = $300 + spread

so as you can see....the risk in both cases is the same $300, but using high leverage..our buffer for loosing trades (drawdown) is larger as we have to loose 470 pips (compared to 262 pips) in order to reach bankrupcy (ofcourse we'll get bankrupt before that..because after lossing trades..we need some money for buying and margin in the account to trade further, but u get the point). so money worth 470 pips in your account is better than money worth 262 pips..as the former will keep you in the game longer.

high leverage is dangerous...if you start with $500 account and then want to trade at 400:1 leverage...because then one bad trade will wipe you out.

i might have made some mistakes in this examples as i have assumed some things..and taken account risk (2% - 5%) out of the picture. also i have assumed that money management practise does not exsist....which will suggest you too decrease your exposure in a losing streak. i might be right..or might be absolutely wrong. please correct me as you think right.

regards
There are many more experienced traders on this forum that can answer this more comprehensively than me but basically yes! This has already been discussed on this forum so have a search for the original discussion.

Leverage is a powerful tool when used properly by an experienced trader.

An experienced trader would use the minimum amount of money in the "trading account" to execute trades that would not incur a margin call. The rest of their money could be put into a safe account earning interest, rather than being used to cover the margin for trades.

Thus the "trade leverage" in the trading account would be high but the "total portfolio" leverage would be low.

Best regards
Alan
  • #14
  • Last Post: Dec 15, 2005 2:53pm Dec 15, 2005 2:53pm
what you have said is very true...Alan. i want more experienced traders to share their view on this leverage issue. so that i can truly understand the concept.

regards
gabroo
and i grow...pip by pip.......pip by pip!!!!
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