1% Money Management is a myth, fib is a myth and so on..

That's it!

Especially if your broker allows you trade any size. Imagine your method with Rirk-Reward ratio of 1:1 [use any other numbers if you like]

Trade account $1000

After one loss then one gain:
first trade: $1000 - $10 = $990
second trade: $990 + $9,9 = $999,9

After one gain then one loss:
first trade: $1000 + $10 = $1010
second trade $1010 - $10,1= $999,9


Maringale says - after each loss enlarge youru position
1% says - after each gain enlarge your position
in fact both are bad.

Why does it wipe your brain?

In my opinion if last trade while going in red was loosing $10 per pips and now it loses $11 - it may cause some discomfort that finally may affect your psychological side.


What instead?
Befor any trading first of all pick, your trade size. This will make you to pick max SL you can accept [so if given setup demands bigger SL, skip the trade].

Than whatever setup you spot, enter always same size. One day you may say, ok I made lots of profit, I would like to trade bigger sizes than so far [1% bigger, 10% bigger, 50%, all depend on how much did you make so far, and what would make you feel comfortable]. So from new day, new week, or new month, you can start with bigger amount.

If you skip between trade sizes on a daily basis this in my opinion may hardly drain your mind.


If you like this guys, just let me know, so I will blow couple other myths I encountered on FX market, like fibs, candle setups, Risk-Reward ratios and so on

Well said Krysztau.

That's absolutely correct as I've experienced it before.

Newbies should understand this, it's not about doubling your money as soon as possible. It's about minimizing your risk and being calm and relaxed and confident in your trading decisions.

I do increase my lot sizes every 3 months as I feel it's more convenient for me.

Please do continue posting, this thread might get sticky.

Ok now i will use your own example.

After one loss then one gain:
first trade: $1000 - $10 = $990
second trade: $990 + $10 = $1000

After one gain then one loss:
first trade: $1000 + $10 = $1010
second trade $1010 - $10= $1000

So whats the point in always entering same size??



And how did you determined that every body trades like this.( I mean one gain then one loss one gain then one lossone gain then one loss).

there are people who will have 8 winners and 2 loses so they would need a R:R of any thing near 1:1 and they will be profitable in the end.

there are people who will have 2 winners and 8 loses so they would need to adjust this R:R at a level that those 2 winners make up for these 8 loses and some profit also.

there are people who will have 1 winner and 50 loses so they would need a R:R according to that.

there are people who will have 50 winners and 1 loss so they would need a R:R according to that.

In end i would say it takes different strokes for different people so u can't use just one example and make the decision.

Aiming for 1:1 in my opinion is a limited concept however you can only take what is available to you. This may be due to;

1) the current market environment (in other words that move that has occured is all that will happening this time around)
2) or your tolerance to profit taking which for new traders is very limited because you dont want to see those 20 green pips turn into 0 or worse -tive pips.

So there will be times when you will have opportunities to take a more than 1:1 which will benefit your 50/50 trading plan by locking in more reward in comparison to risk over time.

Also on the note about choosing a lot value and then building the risk around it. Not sure if that makes the above situation any better, infact if you have a proven method with years of backtested data that proves a viable edge, you could be missing trades that you would have taken with the orginal 1% myth that could be the winners that make the difference. If you have method then be disciplined enough to trade it, especially through the rough patches. One of the most common pitfalls for new traders is to abandon ship at the first sign of trouble. Usually when you do this you go back to it later down the track (usually after you are jumping ship again) to find that after a few rough trades or a few bad weeks the signals returned to deliver great profits.

1% risk is just a number. It is a conservative approach to trading that minimises drawdown. The myth in it lies in the fact that if you took all your trades with 5% instead of 1% you would be 5 times richer. While it might be true you also have to be ready to absorb the 5 x poorer part.

Trading profitably over the long run requires you to have a complete system built. Not just a little from Money and Risk Management, a pinch of entries and a splash of exits. It also requires 1 to remove there heads from the clouds and step into reality. There are very seldom traders who have made phenomenal money out of nothing. They are very few and very far between so the best thing a trader can do is take the journey step by step, minimise your risk exposure early on and build your account little by little.

The shear number of traders and threads talking about 200% per year (or month) is rediculous. While you talk about $1000 as a starting capital the reason why these threads exist is because the market average is just not enough. Even some of the best performing funds have growth rarely eclipsing 30% and those that do go beyond usually end of blowing up spectacularly like a good number have over the years. 20% on $1000 is not alot for the time and effort that you may put in, but if that is how you think then you will never get far. You thinking should be along the lines of building trust and discipline, enough of it so that when you are ready to add more funds and trade a greater amount your emotions dont get in the way because over the course of YEARs you have proven to yourself as well as confirmed your previous testing that the edge you have exists.

Where you go from that point is completely up to you but having the correct mindset is paramount to future success. If you cannot bring some optimisim to your trading then the question is simple 'What are you doing?' There are reasons why most fail and im sure there are enough threads and posts on the matter. You can succeed if you want to be disicplined enough, determined to learn from your every move. Your success doesnt mean you have to be a millionaire out of this, it can quite simply be that you make a side pot for entertainment, holidays or just to fix your lawnmowing gears (personal story that one ).

Take care

Razor

Traders use fib and candle stick analysis...it works if one puts the hard work in learning it.

I used this example just to introduce some general theoretical model. If you adjust your trade size after every trade this will sabotage your trades, no matter what your R:R is and how often you win or loose.

Same size gives you some little adventage over those who adjust it everytime. That's the point.

Razor_trader
I agree with you however my point was not to talk about best R:R or changing market conditions, but this only and particular topic.

Money Managment

I must admit that MM is very important and my purpose is to point where ppl can get it wrong.

Much more interesting is, what one should do, when he's 50% below initial deposit.
I think apart of rethinking trading style it may be not really good to lower trading size IF one decided to NOT to change trading style...
But there's more to say on topic what if I lost 50% than just - shoild one reduce trading size

My purpose is not to say that it's not working. I would like rather spot some points where obvious rules of trading repeated all around forums and webinars just miss real life.

Could you try to explain your logic a bit more?

Apart from your narrow example where your idea is better, I don't see your point.

What you are doing is starting risking x% of your account, if your balance goes down your x goes up (martingale). If you win your x goes down until you reach your tipping point where you increase lot size, where x suddenly grows again, probably to your original x.

Any theory as to why this is better then sticking with a constant x?

Theory is explained exactly in my first example of two trades. Whatever R:R you use or what % of account you risk, your account will move toward zero if number of pips gained is the same as number of pips lost.

If instead of keeping x constant you keep order size constant your account size would not change if you lost and won same number of pips.

I wouldn't call it martingale as long as you don't enlarge your size after loss.

From psychological point of view - it's better for brain if it familiarise itself with trading activity. You can help it by keeping same profit change on same price fluctuations. If once there is $10 per pip, then $10.1 and two days later $9.8 it may be slightly confusing.

That's why I would advise change trade size once in a month, or every doble accont size or whatsoever.

Problem I see with the logic is this:

If you're making as much as you're losing, there's no point trading anyway really.
I believe this is the only situation where sticking to the same size is better.

If you have a negative expectancy, using a % risk will give you more time to sort out your trading and gain an edge (more failed trades until hit $0)

If you have a positive expectancy, using a % risk will give you more/quicker return.

I haven't had time to think on it much, but I'm pretty sure the above it right.


As for finding it confusing having different lot sizes, I've never found that to be true.

in an effort to not repeat myself
http://www.forexfactory.com/showpost...5&postcount=11

edit : its basic gambler theory
which is essentially wat 98% of the people on this board does if you wanna gamble act like a gambler and make money and do this grind the markets...

the 1-5% thing if for real traders... ya know the ones who know how to increase exposure and not risk

good luck

It would be relevant to point out that 50% drawdown is quite extreme but is a matter of initial risk per trade. In the event that a trader risks 5% then he will reach that point somewhere around 15-16 consecutive losses, for 1% it is greater than 70 consecutive losses. In the end if you have a win, loss, win, loss system or 50/50 or coin flip which only aims at 1:1 then yes you will be pushing a preverbial up hill. In order to recover from the drawdown you would have to change your approach. Even with the above it you where to secure 1:1.1 (5% risk with 5.5% reward) without damaging the 50/50 outcome you would slowly make gains. So in the event that you risked 30 pips and aimed for a gain of 35 pips (slightly bigger than 1.1) then you will make up small ground. Traders that exceed that would be a huge boost your account but it takes a shift in focus from an edge that has slight negative expectancy to one that has even only a slight positive expectancy.

Once again this would be relevant to the stated win loss win loss system at 1:1. I hope im on the right track as your are with this otherwise im confused at what your trying to get at.

Razor

It looks good in the short run but if you ran a spread sheet you would see that in the case of

Parameters:

$10000 starting capital (could be any amount you like)
Risk of 1
Reward of 2
Win/loss/win/loss

First account guidelines
*fixed risk of $500 which is 5% of your account, this doesnt change

Second account guidelines
*alternate risk of 5% of cumulative growth

In the beginning you would notice that account 1 holds a slight advantage over account 2 in the loss stage. Account 1 would be back to 10500 after having account of 11000 due to 1000 win while account 2, which also enjoy the 1000 win would surrender slightly more. In fact through out the exercise account 2 would surrender to being lower than account 1 on the loss side (up to around the 14th-15th cycle, after that the superior account size and risk draws away) but due to the 10% (5% doubled in the 1:2 ratio) gain it will always finish infront of account 1.

You can do a basic spreadsheet to confirm it yourself, i will post mine here (someone can confirm it as its saturday morning and im tired but im sure the maths are correct).

In the end it comes down to the trader and how they like to trade. 5% is way to much for me but even at 1%, the rewards are higher as the account grows then a fixed lot. If you adjust the lot at intervals (like when the account reaches a level) then the gap may close slightly.

Razor

We could play with number all day so I guess its every trader for there own opinion. All the matters is tomorrow and whether your here or not

the post is just an idea of the benefits of fixed sizing not the full way you still have to solve the problem of adjusting increasing and decreasing fixed lots usually fixed traders use plateaus and # of significant trades...

for example while you may say 1% based on account id say something like 5% based on account in plateaus from a watermark then for fixed we say how many trades till well find balance... and say 10,000$ account *.05 = 500 draw down / 150 trades to hit next plateau ... then total risk per trade must be a fixed 500/150 = ? number this is to let your trades be impacted by law of large numbers without significant risk (5%) so if you draw down a certain amount you generally stop and say my edge is not there over 150 trades... or my edge is still here lets trade the next plateau...

this provides accelerated growth with limited draw down and safety...

now like i said this is the way a gambler should look at trading.... these guys trying to step into 5 min charts and gamble their money... this is the way Machines look at management as well. This does lag in profits from behind a % based model with a higher win rate but of course it will... because %ages will create a log effect ... common sense % traders with consecutive gains will beat fixed but fixed has less risk and is more efficient... fixed trading requires 15% less win rate to break even than a % trading style.

-> the reason I state that the majority of the traders on this forum should use this style is a number of reasons...

they dont know their edge or if one even exhists...

they typically dont trade higher more fundamental timeframes.. they trade

4hour or less - this is best managed by gambler management styles.

If they start with a live account % sizing requires less discipline than grinding a fixed system.. and a fixed system provides safety when you dont know your edge.. you can quickly see if a system carries an edge over X trades and what that edge is.

The plateaus allow for greater exposure to the markets when systems when and wont cause "death by 1000 stops" type blow ups.

plus many more reasons.

like I said % of account based trading systems are ment for real traders...

a real trader is defined as understanding his edge and performance of that edge through many trades. Also the use of longer time frames.. where efficiency is produced by trades in the market and management or trader efficiency is no longer needed... then profits will grow at a faster rate due to being a % of account and they understand their edge and can wade through "expected" draw downs...

a gambler uses fixed style systems as he is searching for an edge and is not a trader like 98% of this forum. by using fixed he can realize gains through his trading efficiency where theyre maybe loses using a % gain strat. the 15% added efficiency in win rate can provide a chance for the trader to realize gains as well as seeing an expected statistical win loss rate based on his trading... and will be able to apply a more realistic % of account trading % after better understanding his edge thus optimising his returns...

as with any on paper calculations your assuming to make a % of account strategy beat a fixed that the overall win rate is high enough to put the % based into profit... with that edge of course a % based will out run a fixed based. but when the edge doesnt exhist where the % based style will not make a profit the fixed based does make a profit... this give the trade valuable information about there strategy that couldnt have been realized with a % based system... and since 90-98% of traders fail... the point could probably be made that they fall under gamblers and thus the bulk of the trading community should be aware of a style of trade management that is more suitable to their style of gambling. the point could also be made that as you become a better trader the transition from fixed style trading to % style trading should be made to maximize an edge instead of trying to keep a new trader afloat.. the need changes...

anyways that was a long post

here is your sheet refined ... you can play with the bolded numbers and check out win rates and risk:reward... its accurate... youll notice you can do 33.33333% win rate and be profitable with fixed and you lose with % based at this level but youll notice as the win rate increases % crushes fixed...

this sheet is to show what i mean gambler vrs. trader... 98% lose on this forum they need to use plateau'd fixed sizing...

traders who understand their edges should use a fixed system then transition to a % of account based system of MM...

I think youll like the sheet.

DOM

check out how the disparity increases as you take on more risk for the same reward in % as well... do 10 risk and 10 reward at 55% and look what happens makes the case that increasing you risk you make a bit profit now do 30 risk 30 reward at 55% and see what happens naturally your balance decreases if you absorb more risk without increasing your win rate

so those guys you see saying ive got a win rate of x and profit of X and its narrow and they look to increase risk with a narrow profit factor in a working system to drive up profits will just run themselves into the ground !!!

the MM seems to degrade over 11%risk reward at 55%

I love martingale theory
this is something Las Vegas Gamblers used to play with.
I guess it could be a sort of money managment,
but it isn't 1%

it's like this,

first trade, 1 lot, is a looser
second trade 2 lot, is a looser
third trade 4 lot, is a looser
fourth trade 8 lot, is a looser
fifth trade 16 lot is a winner

and you win everything back plus a little more,
then you start over from the begining with 1 lot

the only problem with this theory is that
your acoun't must be nearly limitless
if it is you simply can't loose
it's impossible acording to the laws of probabilty.
but the doubling effect runs away pretty quickly,
only after 10 times you are up trading 512 lots
and after 20 times if you still not win
you are up to 524288 LOTS! LOL

boom well said

You better go blow other myths, cause you haven't got a chance of blowing this, not in my books anyway, 1% Money Management is a myth ???

it's not rocket science, cut the losers at 1% or 2%, let the winners make more than that, DOH