MM by Van Tharp

Hello

Yet another question before next hard week

I re-read a van Tharp's book recently.
He writes about money management:

"MM is NOT:
- The part of the system defining how much you might loose
- The part of the system defining how to control your risk"

He says: MM is the part of the system defining the size of the ALREADY OPENED position.

(hope I translated it more o less precise back to english)

So... guys, what about changing the position size AFTER having opened it?
It looks like every our MM discussion is in fact a discussion about something else...

Can anyone explain who is wrong?
van Tharp writing this? me understanding it wrong? or are we here all wrong about MM?

I think you miss understood it Not too far, but Tharp is saying the same thing. If you think about it, the amount you are willing to lose, risk control or the size of the already opened position, they all revolve in one circle and lead to each other.

Suppose that you have 5 mini lots opened, and you risk 2% of your capital which is $10k, then you are risking $200, which acocunts for a stop loss of 40 pips. Now, your management to the open position might not be the same as another trader. For example, I might be breaking down the 5 mini lots with different stop losses for every 2 lots, with the last lot having the largest stop loss and I still don't risk more than $200.

Take this, if the trade goes against me 20 pips, I will close 2 losing lots, thus realizing a $40 loss and having an un-realized loss of $60. If the trade moves against me another 20 pips, I will close another 2 losing lots, and realize another $80 loss since those 2 lots actually went against me 40 pips, but now, I am having an un-realized loss of $40 on just 1 remaining lot, and so far, I realized a $120 loss out of my $200. Should the market move against the remaining lot by another 40 pips, it should be closed for a realized loss of $80, making the overall loss for the whole trade as $200.

Here it goes:

Long 5 mini lots at 1.2000

Closed 2 mini lots at 1.1980 (Total loss of $40)

Closed 2 mini lots at 1.1960 (Total loss of $80)

Closed 1 mini lots at 1.1920 (Total loss of $80)

Total loss for the trade = $200


You are managing the opened position, but you are once again sticking with your max loss per trade, which is $200. The advantage here is that you gave the market room to prove that you are completely wrong, instead of closing all 5 lots after a 40 pips move against you, you totally got out of the market after an 80 pips move against you, yet your lost what you can afford to lose in the first place.

What I want to say here is that what Tharp is saying is not wrong, and what we are discussin here is not wrong either, it's just we are talking about the basics which everyone can apply, and Tharp is talking about an appraoch which fully depend on the trader to decide upon.

What Tharp is talking about implies hundreds of variations, the above example can have a thousand MM tecniques, 1 is mentioned above, another is to have a 40 pips stop loss for the whole 5 mini lots, another is to close 4 mini lots after 30 pips and the last lot to be closed after another 50 pips.

Pre-trade MM doesn't have a large number of variations, I mean it's simple, you define your risk per trade, and through it, you define your lot size and calculate the stop loss, or you already know your stop loss, and calculate your lot size accordingly.

Post-Trade MM implies art and is very related to the trading strategy you are using. If you are using a volatile strategy and expecting the market to move against you by a wide margin in 70% of your trades, you might consider having different stops for your lots. If you are using a stable strategy which does not have large drawdowns, then equal stop loss is perfect, and in between, there are many variations


Thanks,

Nader

nader,

that was an excellent explaination
thank you

the number of times ive been or read about other forumites' stops just being touched and then the market moves in the right direction. this is going to be a superb addition to my armoury

thanks again

Thank you narafa, now I understand what van Tharp wanted to tell. I need to re-read the chapter again

I think about it again and again. And I think I don't agree with that approach.

Every trader calculates the probability of success: I think - if it is over 50% - stay 100% in the game. if less then 50% then get 100% out.

By closing 20% of your position after a small loss you loose 20% of your potential profit, so I dont see any gain!

I think after a longer time simple 100%-strategy gives similar results as the vanTharp's one. Then it is better since it is SIMPLER!

Probabilities change over time. If you are opening a long position that have a 70% probability to go in your favour, and yet it goes the other direction, the probability is changing against you. For example, the 70% probability of going up to a certain point won't remain the same if the pair moved 30 pips in the other direction, let's say it will drop to a 60% one. So still there is a chance, if you close your position completely, and the market decides to take the 60% probability and goes up, you completely lost the battle as you are already out of the market.

Yes, by closing every successive lot for a loss and keeping the rest of your position open, you are decreasing the gains you are going to get if the trade goes your direction, BUT, you are giving room for market volatility, giving room for pullbacks, and also giving room for yourself. Who knows, maybe the market goes in your favour and the probability of continuation upwards is decreasing, so you close your position at either breakeven or at a profit. Most importantly, whatever you are doing, you must stick with the max loss you are willing to lose per the trade.

It's a trade off man, and you have to give up something to get the other, depends on the trader.


Thanks,

Nader

just an observation:

it is worth attention, that in other chapter Tharp proves that:

taking profit by closing a part of your position when the market goes in the right direction IS WRONG, because trader risks the whole trade size and wins only with a part of it.

on the other hand he says:

taking loss by closing a part of your position when the market goes in the WRONG direction IS RIGHT.

One could imagine that everything what works for a certain situation works also with the "negative" of it another way round. But it is not!

I entered a difficult area of this world

to narafa.

That was incredibly well put, you applied the concepts from Van Tharp's book on position sizing in a manner that I can practically apply to these currency markets. I fully understand how it meets all of Van Tharp's recommended strategies.

Ultimately with what you've outlined I am getting maximum lots when the trade goes optimally in my way.

The losers on the other hand are still cut at my % of balance risk per trade. On the other hand the trades that aren't as strong still have potential for profit albeit with lower then maximum position size.

Either way I can see how it can be psychologically less straining to trade the way you suggested compared with constantly having to re-enter positions after being stopped out only to find the market going back in your favour.

I see the potential for a better success rate and reward to risk ratio.

My question to you is this (hopefully you will be kind enough to reply):

I am trading multiple time frames. The 5min, 1hr, 4hr and Day and if each of these charts has its own trend and positions are triggered from the lowest time frame what do you think would happen to success rate and RR if:

All time frames show the same trend and an entry is triggered causing 4 lots to be traded. On the other hand, if 2 of the 4 time frames showed the same trend and a position was triggered, 2 lots are to be traded.

Basically each chart is worth a lot and the amount of lots to be traded depends on how many charts show the same trend when the position is triggered. Couple this with your suggestion regarding stops I think I can make a great distribution of R multiples.

Thanks again.

I know I'm posting half a decade later but can you expand on this?

Has to do alot with b/e point, adding to winning position and decreasing on your losing position. This is a powerful strategy combined with good MM.

I'm searching the forums for more Van Tharp info, but what book(s) does he mention this stuff in?

One concept says to never ever close partial when trade is profitable but to close partial when trade is negative.

An example...

Open 1 lot with 75 pip SL. Trade goes 50 pips against you. Close 0.5 lots and allow trade to continue either to your original SL or to profit. This way if it goes to your original SL then your weighted loss will be less then -1R. In this case it will be -0.83R if it hits your SL. If you had not done this then your loss would have been a -1R.

Open 1 lot with 75 pip SL. Trade goes in your favour and you take 0.5 lots off at 50 pips and close all at 75 pips. In this case, your win will be 0.83R; however if you had not done a partial close then your win would have been a 1R win.


So, by doing a partial close when the trade is against you, you will decrease your loss as it relates to R. By NOT doing a partial close when the trade is in your favour you will increase your R value.

Over the long run this will make a big difference. Your biggest winner always has to be bigger then your biggest loser otherwise you will end up in a negative expectancy long term.

People try to calculate R multiple in advance but this is truly impossible. You only know your risk so you have the basis for it but until the trade is closed you will not know it.

As an example I like to use a 75 pip SL with an instantaneous jump of 25 pip every 25 pips to BE. So if my trade goes to +25 then my SL is now -50..when the trade is +50 then my SL is now -25 and then the next jump moves it to BE. AT that time I am also at a 1R value and PA will tell me to close or not. If at some point the trade had reversed against me then my SL would most probably be less then my original 75 pip SL. It is very rare that a trade will go against me right out the chute but it has happened.

So over time, I may have something like a a string of 1R winners, BE(0R), -0.66R, -0.33R and a few -1R trades. By moving out this way I am able to maintain a positive expectancy and therefore profitable over the long term.

Van Tharp does it by scaling out of a losing position and not scaling out of a winning position.

do a google or torrent search for Van tharp,"special report on Money management", as well as "Trade your way to Financial freedom".

You will find the pdfs.

http://i49.tinypic.com/2qnxn6b.png

Is my interpretation of this correct?

Use ATR(10). 3 times that will give you the stop loss to use.

Create a new position every time the first one increases by ATR(1) pips. The stop loss for the new position will also be ATR(10) pips.

Move the original trade's stop loss to the 2nd trade's stop loss (so it will be slightly above BE).