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2% Money Mangement Complications!

  • #1
  • First Post: Apr 23, 2010 2:54pm Apr 23, 2010 2:54pm
Hello,

New to being a member but definetly not new to the site. Been a trader for 8 months and have yet to see profit. I have just been constantly breaking even...

Anyway my question is for money management and possibly some of you experienced traders can help me out.

I find I always risk up to 2% of my account per trade. I had started with $500, and 2% of that is $10. And for this I trade a micro lot, as just -100 pips would reach my max risk.

My main question is: If I am risking my capital 'the proper way' by using 2%, not over leveraging, and looking for consistent small gains as this is how the big players I am guessing do it..why do I need a 100:1 leverage other than for maintaining less funds in my account? Heck, I am using a 2:1 leverage and possibly 4:1 when I use 2 microlots.

But that limits my stop loss to having a movement of -40 pips max...which in itself is pretty common I guess. The max I can see is someone doing a 10:1 leverage.

So...is 2% right to use? What I would like to know is what other traders, preferably profitable traders use, in terms of max stops(as it doesn't always need to be the max you can afford to lose).

Thanks for reading.

  • #2
  • Apr 23, 2010 11:23pm Apr 23, 2010 11:23pm
Tbb,

There is no "right" way to do any of this stuff. Leverage is necessary because it allows your position sizing to be different. In the above example you're @ 2:1 with 100 pip SL for a 2% max risk exposure. You could just as easily go 20:1 with 10 pip SL for that same 2% exposure.

A good rule of thumb (in terms of appropriate risk uasage) is to have gains and losses be small enough that your equity curve (and state of mind) barely notice a difference... regardless of any single trade outcome. This way you can sleep at night, and make decisions during the day (and not the other way around)

Hope the above helps,

MM

P.S. Congrats on break even after 8 months. I think I had blown out about 2 to 3 decently sized accounts at this point of my trading
  • #3
  • Apr 24, 2010 12:37am Apr 24, 2010 12:37am
Quoting Tbb
why do I need a 100:1 leverage other than for maintaining less funds in my account?
Exactly!

Leverage, or gearing, in this context only affects your brokers margin requirement (deposit) for a trade, not your risk, it's something a lot of people don't understand.

2% risk is neither right nor wrong, there are hundreds of different ways to manage risk and manage your trades.

There is no minimum or maximum stop loss, a stop loss should be set based on your market analysis not on how much you can afford to lose. Calculate your stop and then adjust your trade size accordingly, not the other way round.

As mr.marektz said, congats on the b/e after 8 months!
  • #4
  • Apr 24, 2010 6:44am Apr 24, 2010 6:44am
thanks for the replies guys, another long post coming your way

break even is nice and I haven't lost an account yet but I think everyone needs to lose one, hopefully the day never comes. . I had a nice consistent gain for a while in my account but then I ended up loosing it on a stupid mistake/emotions. Till this day, I struggle with inner conflict..lol. I would love a great psychology book that would maybe show how to not be affected much during drawdowns...and when to draw the line. So far to fix this, I feel like I just have to be in the market more to witness those drawdowns and losses so I can get accustomed to them if they come in the future again. If you guys would know any that are actually good please list them because the ones I've read so far are ones that just keep rambling on unnecessary stuff.

Anyway, back to the main topic.

My main issue is, if I use a micro lot, and lets say I have a stop loss of -100, which would be a loss of $10 of my account...I tend to watch it go ALL of those -100 pips before closing.

I know it looks like a lot in the sense of pips but when I start considering equity..I am well within my max exposure thus this makes me stay in the trade telling myself 'It might come back and if it doesn't you are in your max exposure' which usually stops me out at -100 pips. Which confuses me...should I be worried more about loosing pips or equity!!? Because if I loose equity more, its bad for obvious reasons...but loosing that many pips is bad as well as it will take you double those pips assuming you follow your plan to get back any gains and taking those pips lets say 200 pips if my stop loss is -100, is much harder to get from the market...rather than if it was just a 5 micro lots which would just require 40 pips of movement to make the same amount.

When would you consider a move has been made against you? When it moves -20? -30? -40? -80? I know its different for different pairs..I am more interested in the GBPUSD, EURUSD, EURJPY and GBPJPY?

Thanks so much for reading this long essay....

GAH CONFUSING!
  • #5
  • Apr 24, 2010 8:32am Apr 24, 2010 8:32am
Quoting Tbb
break even is nice and I haven't lost an account yet but I think everyone needs to lose one, hopefully the day never comes.
Why don't you blow this one out now and get it over with? I'm serious, it's a small account, try overleveraging the hell out of it and see what happens. If you can pull out your initial risk before you blow it, then do so, but still blow it out. Get it out of your system now.


Quote
I had a nice consistent gain for a while in my account but then I ended up loosing it on a stupid mistake/emotions. Till this day, I struggle with inner conflict..lol.

Read Nasim's book, Fooled by Randomness. All of our winnings are because we're smart and all of our losses are because of "a stupid mistake..." as you put it. Maybe it is, maybe it isn't. Maybe it was luck.

Quote
I would love a great psychology book that would maybe show how to not be affected much during drawdowns...and when to draw the line. So far to fix this, I feel like I just have to be in the market more to witness those drawdowns and losses so I can get accustomed to them if they come in the future again. If you guys would know any that are actually good please list them because the ones I've read so far are ones that just keep rambling on unnecessary stuff.

The only way to learn how to deal with drawdowns is to have them. Psychology books are just like a tool. It could be the best tool in the world, but in the hands of an unskilled worker, it's as good as the worst tool. Iow, all the books will tell you the same thing. They may package it differently, but it's all the same thing. Most people will not put in the work that these books require.

It's why the self-help industry is so friggin huge. They're all working from the same principles but they know that the average person will read their book and think, "Gee, this is great stuff" but they won't do the work. Then the person buys another book hoping that it won't require as much work as the last one, but it does. So, they buy another book, and another, and another... I know, because I did this myself until the day I finally realized that I had to do the work. Once you get to this point and start doing the work, then just about any decent book will do the job. I'd reccommend Napoleon Hill, Practicing the Power of Now by Tolle, or something by Joe Vitale. And meditation, lots of it.



Quote
My main issue is, if I use a micro lot, and lets say I have a stop loss of -100, which would be a loss of $10 of my account...I tend to watch it go ALL of those -100 pips before closing.

Fuck that! Unless you know for a fact that your system will yield better returns in the long run by staying in to the last pip, get the hell out once it becomes obvious that your trade idea didn't work the way you thought it would. I'm guessing that would be at about 30 pips, not 100.

Quote
I know it looks like a lot in the sense of pips but when I start considering equity..I am well within my max exposure thus this makes me stay in the trade telling myself 'It might come back and if it doesn't you are in your max exposure' which usually stops me out at -100 pips. Which confuses me...should I be worried more about loosing pips or equity!!?

As soon as you tell yourself "it might come back", close the damn trade. So what if it does? At the point you're saying that, you KNOW that the odds are it's not coming back. Close the trade and put another entry order in where you got in initially. If it comes back you'll pick it up. If it doesn't, you lose nothing.

Understand that you can get back in when you want, but if you're bleeding money, even if it is in your parameters, you won't get back in. Taking a full size hit will also prevent you from jumping back in right away even when the market is screaming at you to get in because that loss takes some of the wind out of your sails. But if you were to initially risk 1.5% and cut the loss short at .75% then it's a lot easier to get back in right away.


Quote
When would you consider a move has been made against you? When it moves -20? -30? -40? -80? I know its different for different pairs..I am more interested in the GBPUSD, EURUSD, EURJPY and GBPJPY?

You need to trade using something more substantial than an arbitrary number. Something like a new high or low, a trend line, a S/R line or something that signals that your trade idea didn't work out. Hell, even using just the open of the day is better than just a friggin number you pull out of your ass. If price is above the open, then only buy and put your stop below the open and reverse for short.

If you insist on using numbers, then at least use a percentage of the ATR, something like 1/3 of a 21 period Daily ATR would work better than a random number.

Yea, it's confusing. This shit will drive you mad if you let it.
  • #6
  • Apr 24, 2010 10:50am Apr 24, 2010 10:50am
Quoting Tbb

break even is nice and I haven't lost an account yet but I think everyone needs to lose one, hopefully the day never comes. ......
Find a strategy you like, make sure it has some basic rules and trading parameters, check it's viability, then develop the discipline to trade it. Job done.

If you're going to blow out an account at least learn something from it, don't just do it recklessly, it's not an item to cross off some imaginary checklist of 'things to do' or to 'get out of your system' before you can become a 'real' trader.
  • #7
  • Apr 24, 2010 10:52am Apr 24, 2010 10:52am
Quoting Dopey

And meditation, lots of it.
Oh jeez......
  • #8
  • Apr 24, 2010 1:07pm Apr 24, 2010 1:07pm
The only way you can stand those drawdowns and losses is to know that your approach has an edge. Otherwise, if you can't say exactly why the sum of your winnings is bigger than that of losses is very possible that you're trading randomness and in the long run, regardless of money management, you'll lose due to the spread.
The books, meditation, zen are useless against the law of numbers.

The stoploss shouldn't be the same number always, that's stupid. Identify on a chart the price which once reached will signal that you are on the wrong side of the order flow. Usually it is a few pips above or below of some significant support and resistance.
  • #9
  • Apr 24, 2010 1:36pm Apr 24, 2010 1:36pm
Quoting pipmutt
Leverage, or gearing, in this context only affects your brokers margin requirement (deposit) for a trade, not your risk, it's something a lot of people don't understand.

2% risk is neither right nor wrong, there are hundreds of different ways to manage risk and manage your trades.

There is no minimum or maximum stop loss, a stop loss should be set based on your market analysis not on how much you can afford to lose. Calculate your stop and then adjust your trade size accordingly, not the other way round.
Agree 100% - well said, IMHO.

It's surprising how many folk don't understand the difference between risk and leverage.

Re stoploss placement, entry and exit points that have no technical (or statistically demonstrable) basis can not possibly provide an 'edge'.
  • #10
  • Edited 9:36pm Apr 24, 2010 5:37pm | Edited 9:36pm
I appreciate all your well informed inputs. Believe me I do. I'll post up a chart soon that shows you guys what I exactly mean about letting things run too far...and why I did.

I should specify that my stop loss is not a number but is based on analysis of the market, ie trend lines, support and resistance, high and lows of candles.

But, it does get very confusing as to decide when to take in a loss, as there is ALWAYS a resistance above another resistance and always a support under a support. So, the thought process that goes into my head is 'It should bounce off the next support or resistance and start going my way' ...but it doesn't and breaks through, and this happens over and over again for the next to next to next support/resistance. Its hard to decide when enough is enough as there are literally support and resistance's everywhere, granted some are more prominent and require more attention. Its still a bugger though.

My risk reward is always variable but I can't seem to figure out when enough is enough a currency going the opposite way of what i want.

Also, pipmutt. I do I guess use a strategy using just PA. And with PA technically a lot of things work..including S and R, trendlines, chart patterns, candlesticks. I use all of these in conjunction, and try to figure out the probability of where it would go...but it doesn't seem like a real system(You know, no hard evidence type thing, like a MA crossover, or this indicator pointing up etc etc). Also, how on earth should I backtest this kind of system? As its just my intuition. As the result of PA analysis is that it just makes my intuition point to a specific direction.

I feel like I am not doing justice as not really basing my trades on a system...unless my PA analysis could be considered a system in itself.

gah again.
  • #11
  • Apr 25, 2010 2:00am Apr 25, 2010 2:00am
Quoting Tbb

So, the thought process that goes into my head is 'It should bounce off the next support or resistance and start going my way' ...but it doesn't and breaks through, and this happens over and over again for the next to next to next support/resistance......

.....I feel like I am not doing justice as not really basing my trades on a system...unless my PA analysis could be considered a system in itself.
Sure it could, why wouldn't it be?

If I'm reading this right you're finding S/R, expecting a bounce, but it doesn't hold and price breaks through.......and that's when you get your dilemma. Do you close with a loss or do you wait for the next S/R and hope it bounces off that one. It breaks through that one as well, another dilemma, wait for the next S/R or close with a loss, hope and pray, it breaks through the next, and the next. Now the loss has got so big that you don't want to close the trade, after all price has gone so far it's bound to reverse soon.....it doesn't and you wipe out the profit from your last 10 profitable trades. And even if it does reverse where is it likely to stop? Previous S/R! But by that time you're so happy that price has come back that you close at break even anyway! All that risk, stress, and time for nothing!

How about this for an idea? Plan the trade before you enter. Let's say your plan is to trade long off a support and have a stop below it. If it breaks to the downside then the trade is wrong, price didn't do what you expected so why are you still in it? Maybe your plan could be to reverse the trade and short the break, and have a stop above it on the basis that previous S is now R. You've obviously got to be careful of being whipsawed all over the place but with a good filter or two you should be ok.

Can it be backtested? Yes, these S/R levels can easily be seen on historical charts, things are going to look the same in hindsight as they did at the time so you should be able to get a fairly accurate picture.

These are only suggestions for consideration by the way, I don't want to tell you how to trade.

Post that chart of a typical out-of-control trade, let's see if between everyone here it can't be improved on.

Don't worry you're not alone, I expect everyone's been through the 'just a few more pips' dilemma at one time or another
  • #12
  • Edited 2:38am Apr 25, 2010 2:15am | Edited 2:38am
Quoting Tbb
' ...but it doesn't and breaks through, and this happens over and over again for the next to next to next support/resistance.
hasnt it occurred to you from your own repeated experience that perhaps it might be better to trade in the direction of momentum rather than against it? Price does breakthrough more often than stop and reverse. You are trying to pick tops and bottoms with your strategy and that is notoriously diffcult to do. Look for ways to enter in the direction of price and use the support/resistence break to fuel further momentum in the direction of your trade. Sometimes you are going to end up long at the top and short at the bottom but mostly you will be trading in the direction of momentum long before the move is exhausted. price action at these levels usually provides a strong indication as to whether or not the move is strong enough to make the break
BTC Return This Year: na
  • #13
  • Apr 26, 2010 10:22am Apr 26, 2010 10:22am
Quoting pipmutt
Sure it could, why wouldn't it be?

If I'm reading this right you're finding S/R, expecting a bounce, but it doesn't hold and price breaks through.......and that's when you get your dilemma. Do you close with a loss or do you wait for the next S/R and hope it bounces off that one. It breaks through that one as well, another dilemma, wait for the next S/R or close with a loss, hope and pray, it breaks through the next, and the next. Now the loss has got so big that you don't want to close the trade, after all price has gone so far it's bound to...
Sorry for the late reply, got caught up in something.

Here you go mate. This is exactly what happened. Looking back in hindsight it is so easy to realize what I did wrong and what signals the market was giving me to tell me I am in the wrong trade.

Ok, so this is how it went down.

1. I entered at A, seeing a possible reversal coming as the two upper short term trendlines I had drawn were broken. So i entered at A.

2. It went down for a bit, then shot back up. I was even looking at the 4 hour at this point and saw a pin bar. I realized it will go up but then reverse at R1. Which it did.

3. Came back down again. But this time I failed to draw the blue trend line as you can see that the price respected that for a while...but, there was no blue trend line on my chart so that was one of my mistakes to not get out early. I again figured it will go up till R1 - R2 range.

4. Holding my microlot, I felt that "It is just a micro lot, so MAX if it goes up to R3 even, I will loose roughly $20. As you can see I just increased my risk exposure...but this would be -200 pips. Which is the reason I asked 'is loosing pips worse or equity?'

5. I closed my trade half way between R2 and R3 seeing that the weekend was coming and there was no point of holding on to it. As if it gaps up, which it probably will as the market is in uptrend, then I will loose more equity. And if it gaps down, I can easily get back in the trade.

Thats how it went.

Points the market was signaling me to get out which to be honest at the time I considered quite irrelevant (stupid me) but now looking at it in hindsight, it would have cut my loss really short.
- For instance, the strong pin bar after point A on the 4 hour chart...signaling bulls having control and continuation of the uptrend.
- Price respecting the upper blue trendline I drew...
- Break of R1 with a huge bullish candle, telling me that bulls have strength
- Retracement till R2 after breaking...signaling sellers don't have power as they managed to push it down less.
- Overall weekly / monthly uptrend, hence I was countrend trading.

All these signals could have cut my losses short.

So basically the dilemma was, that I was expecting a reversal at R1, R2 and R3 so I stayed in as it was less that my risk exposure, but soon grew to more that what I planned, when all the signals (If i had analyzed them further) told me not to. Especially the upper blue trendline.

I guess my problem is to judge which signals are right and wrong and the ability to follow them, as well as not negotiating my trade after I enter it...I guess follow a plan?
Also, how do you find my PA analysis by what I showed you? Does it sound like something substantial and sorta spot on?

Thanks guys, lemme know if I missed something crucial.
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  • #14
  • Apr 26, 2010 10:25am Apr 26, 2010 10:25am
Quoting M.A.C.Doug
hasnt it occurred to you from your own repeated experience that perhaps it might be better to trade in the direction of momentum rather than against it? Price does breakthrough more often than stop and reverse. You are trying to pick tops and bottoms with your strategy and that is notoriously diffcult to do. Look for ways to enter in the direction of price and use the support/resistence break to fuel further momentum in the direction of your trade. Sometimes you are going to end up long at the top and short at the bottom but mostly you will be trading...
I am guessing this is scalping? I noticed this for the last month or so, of how price follows scalp lines. I used to always trade this way using long term support and resistance lines, but just recently scalp lines have become much more appealing.

Also, I thought there was some statistic somewhere that 80% of breakouts are false breakouts? So i thought it would reverse more than continue ahead? What are your thoughts on this matter?

Btw, the advice I received in this thread is superb. Thanks. I am not a newbie therefore, I can tell it comes from experienced traders. It's all so logical and proper, but when the time comes and I am in a trade, my thoughts about where the price is heading change as fast as my girlfriend's mind.
  • #15
  • Apr 26, 2010 12:24pm Apr 26, 2010 12:24pm
Quoting Tbb

It's all so logical and proper, but when the time comes and I am in a trade, my thoughts about where the price is heading change as fast as my girlfriend's mind.
lol, wait until you're married, you ain't seen nothin' yet!

I guess that's the importance of planning the trade before getting in (at least the risk side of it anyway), and then trading the plan, and only altering it if it's to your benefit.

I know this is in hindsight but there was plenty of opportunity to exit the 'A' short, price had gone down ~40 pips, 'A' support should then have become resistance which obviously it didn't, or worst ways have a stop above R1 which if you hadn't been married to that short trade you probably would have traded the break long, got back your small A short loss and made some money.

80% of breakouts might not go very far but with initial market reaction, and stops being triggered adding momentum, they usually give an opportunity to move stops fairly quickly. Looking at that chart I think only 1 was a lost cause (lol not your short, that long on the left where it says R1 R2, not really a break out but pretty close), the rest made money or at worst only would have lost a few pips. Overall, if you'd taken every breakout on that chart you would have made some decent profit.

You know yourself why that trade was a screw up, that's a bonus, the problem comes when you don't know why!

I think your analysis is basically sound, I love simple strategies like this, it's what I do. Just try to keep it simple, don't be tempted to over-analyse trying to filter out the occasional bad trade because you'll end up throwing the baby out with the bath water!
  • #16
  • Apr 26, 2010 12:40pm Apr 26, 2010 12:40pm
Quoting pipmutt
lol, wait until you're married, you ain't seen nothin' yet!


I read somewhere that if you place a trade the possible outcome should be worthwhile. That means trading microlots is akin to trading demo, i.e. not real enough.
Gone to a better place
  • #17
  • Apr 26, 2010 12:49pm Apr 26, 2010 12:49pm
Quoting smikester


I read somewhere that if you place a trade the possible outcome should be worthwhile. That means trading microlots is akin to trading demo, i.e. not real enough.
You could have a point ("It is just a micro lot"), let's ask Tbb if he would have let that loss run if he'd had serious money on the line. Tbb?
  • #18
  • Apr 26, 2010 1:04pm Apr 26, 2010 1:04pm
Quoting pipmutt
You could have a point ("It is just a micro lot"), let's ask Tbb if he would have let that loss run if he'd had serious money on the line. Tbb?
Well, it would vary i guess. It depends on my account equity. Lets say I have the same, ie $500, and was trading a mini lot, I would have not let it run most likely more than -20 pips or possibly even -30 pips. Thats ~$20 or ~$30! I guess that was my maximum threshold of this trade due to my account, as even the trade that I did with the micro lot, closed out at a loss of $20, while it moved like -200pips.


Although, I think I should seriously consider only worrying about loosing/gaining pips. I just had an 'ah ha' moment that if I get used to losses in $'s, then when I up the stake with a bigger account and bigger lots, if I become a good trader that is,..looking at that loss will be a lot harder as it will 'look' bigger. But, the amount of pips would remain the same. Am i right in thinking this?
  • #19
  • Apr 26, 2010 1:07pm Apr 26, 2010 1:07pm
Quoting smikester


I read somewhere that if you place a trade the possible outcome should be worthwhile. That means trading microlots is akin to trading demo, i.e. not real enough.
Thanks mate, you just made me think about something...that lol needed to be thought about as it hadn't occurred to me. cheers.
  • #20
  • Apr 26, 2010 1:39pm Apr 26, 2010 1:39pm
Quoting Tbb
Although, I think I should seriously consider only worrying about loosing/gaining pips. I just had an 'ah ha' moment that if I get used to losses in $'s, then when I up the stake with a bigger account and bigger lots, if I become a good trader that is,..looking at that loss will be a lot harder as it will 'look' bigger. But, the amount of pips would remain the same. Am i right in thinking this?
Yes, seeing as the market moves in pips. The first calculation should always be based on your analysis in terms of market movement (pips), not dollars you can afford to lose or want to make. From there you can calculate pip value based on [percentage of equity in dollars] divided by [market movement in pips], and ultimately the appropriate trade size.

ie/ according to my analysis if the market moves 40 pips against me then my trade is wrong, so my stop is going to be 40 pips. I'm prepared to risk 2% of my $500 equity on this trade, $10. $10 divided by my 40 pips stop equals 25c per pip, so my trade size on say Eur/Usd should be 2,500 units.

Sorry, I didn't mean to sound patronizing, you probably already knew this stuff

Short answer, yes analyse trades in pips.
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