Money Management - the art of the exit | Forex Factory

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Money Management - the art of the exit

  • #1
  • First Post: Dec 21, 2010 1:34am Dec 21, 2010 1:34am
There are literally thousands of different entry techniques out there. (just look at> Forum>trading systems)

The reason why I chose to start this thread is because I believe that when you are in the market, without a proper exit, any great entry system will leave you with zero profit.


I hope members of FF can come together and talk about their experience regarding exit strategies.
  • #2
  • Dec 21, 2010 2:02am Dec 21, 2010 2:02am
Frankly, exit strategies have not really been something I cared about. I always thought that entry was the thing to nail down before anything. Its important, I can tell you that.


I am currently still in college and because of that I am instead shifting away from manual trading systems to more automated trading systems (EAs). Gathering ideas from different posts of the forum (mainly from Ronald Raygun), I have collected a few EAs.


The entry criteria of these different EAs are pretty straight forward but their exits require a wee bit more tweeking. The tricky part of this is that I am still grasping how construct a proper money management system. All these EAs are all trend-based EAs. Is there any framework that I should follow?




The money management inputs for the EAs include:
-Take profit: in pips
-Stop Loss: in pips
-Trailing Stop Loss: in pips
-Move Stop When Price Reach Certain Pip: when price reaches certain pip, the EA will move the stop loss
-Move Stop To: where to move stop loss


I am in no way asking for the HOLY GRAIL inputs that will make me a million as I am aware of the ever changing dynamics of the market. What I am curious is how other members use these in their EA. How do they determine the proper inputs; is there a general framework that I should follow? I seem to find myself backtesting every single possible input; which I have a feeling I am not doing it correctly.

Any input would be great.
  • #3
  • Dec 21, 2010 3:18am Dec 21, 2010 3:18am
this thread or something similar should be the biggest thread on FF.

money management & exit strategy are the most important aspect but like you say everyone is focused on the entry which in reality doesn't really matter because its 50/50 coin flip stuff but people don't realise.

a small unobtainable minority do have a marginally higher probability entry system.

for my exits im using mauro/mptm ea's

i have looked at fixed TPs and adaptive TP's but they are easier to setup on my auto breakout system than for me to work out mid flight manually trading.

bottom line - follow all the quotes.... cut your losses, let your winners run.
  • #4
  • Dec 21, 2010 3:44am Dec 21, 2010 3:44am
Quoting stimpy
this thread or something similar should be the biggest thread on FF.

money management & exit strategy are the most important aspect but like you say everyone is focused on the entry which in reality doesn't really matter because its 50/50 coin flip stuff but people don't realise.

a small unobtainable minority do have a marginally higher probability entry system.

for my exits im using mauro/mptm ea's

i have looked at fixed TPs and adaptive TP's but they are easier to setup on my auto breakout system than for me to work out mid flight manually...
if entry is 50 / 50 then why isn't exit 50 / 50 (could run further / could retrace)?
Congratulations ScalaFX for coming out of the closet!
  • #5
  • Dec 21, 2010 4:59am Dec 21, 2010 4:59am
Entry is the most important because even with very tight MM, if price always immediately moves against your entry, you'll die the death of a thousand cuts. If your entry is such that price always immediately moves in your favour after entry, then you'll always have a chance to remove risk and let some winners run.
Also, your exit may let you hold on to a winner, but your entry determines whether there will be a winner to hold on to.
  • #6
  • Dec 21, 2010 5:36am Dec 21, 2010 5:36am
Quoting stimpy
this thread or something similar should be the biggest thread on FF.

money management & exit strategy are the most important aspect but like you say everyone is focused on the entry which in reality doesn't really matter because its 50/50 coin flip stuff but people don't realise.

a small unobtainable minority do have a marginally higher probability entry system.

for my exits im using mauro/mptm ea's

i have looked at fixed TPs and adaptive TP's but they are easier to setup on my auto breakout system than for me to work out mid flight...
In terms of your auto breakout system, how do you determine your tp and sl? Do you set and forget?

I am running a few EAs but am having trouble figuring out how to determine a suitable system for the inputs.
  • #7
  • Dec 21, 2010 6:00am Dec 21, 2010 6:00am
Quoting eurotrash
Entry is the most important because even with very tight MM, if price always immediately moves against your entry, you'll die the death of a thousand cuts. If your entry is such that price always immediately moves in your favour after entry, then you'll always have a chance to remove risk and let some winners run.
Also, your exit may let you hold on to a winner, but your entry determines whether there will be a winner to hold on to.
I'll have to politely disagree with you. From my modest understanding of price movement, it is close to a fact from my own experience that it's newly impossible to have a entry system where price will move in your direction once you enter. And this relates to the idea that predicting the market is impossible, which further proves that a good money management is more important as entry without an exit doesn't not yield profitability.

And even if you did have a system that proves to be 99% accurate in terms of price moving in your direction after entry, how is it possible to determine which are the winners and which are the losers? Again, it's similar to saying you can predict when the trend starts and when the trend ends.

Without a time machine, the only option left for us, I believe is to have a proper money management system that is adaptive but at the same time systematic in determining when to get out. But again, I personally do not have the answer gothic question as I am still in the process of determining and building my own MM system.
  • #8
  • Dec 21, 2010 6:04am Dec 21, 2010 6:04am
I also want to point out about the idea of the coin flipping game proposed by ronald raygun. I have yet to have the time to try it, but any input on the usefulness of that would also be beneficial for anyone.
  • #9
  • Dec 21, 2010 6:56am Dec 21, 2010 6:56am
Quoting wguan
I'll have to politely disagree with you. From my modest understanding of price movement, it is close to a fact from my own experience that it's newly impossible to have a entry system where price will move in your direction once you enter. And this relates to the idea that predicting the market is impossible, which further proves that a good money management is more important as entry without an exit doesn't not yield profitability.

And even if you did have a system that proves to be 99% accurate in terms of price moving in your direction after...
what is important is profits/losses. Thus entries and exits are equally important.
But money management by itself won't make you profitable, you need a system with an edge. Money management can just increase profits of a system with an edge.
  • #10
  • Dec 21, 2010 6:58am Dec 21, 2010 6:58am
And I believe trailing & time exits are not too bad, cause you get the max what the market can give you.

Just my opinion.
  • #11
  • Dec 21, 2010 7:05am Dec 21, 2010 7:05am
Quoting wguan
I'll have to politely disagree with you. From my modest understanding of price movement, it is close to a fact from my own experience that it's newly impossible to have a entry system where price will move in your direction once you enter. And this relates to the idea that predicting the market is impossible, which further proves that a good money management is more important as entry without an exit doesn't not yield profitability.
Why would it be impossible to have price move in your direction after you enter? What if you were privy to illegal inside information? Or what if you had another way of telling, in certain specific situations, what price in all probability will do in the very short term? No one's saying you don't need an exit - obviously you do need to close your position - but if you consistently buy tops or sell bottoms then you'll lose regardless of your MM.
Note I'm not talking about reality - obviously you're not going to consistently have price racing in your direction after you trade - but about the concept. I suppose it also depends on whether you view the market as random or not. If it's a random walk then entry doesn't matter.

Quote
And even if you did have a system that proves to be 99% accurate in terms of price moving in your direction after entry, how is it possible to determine which are the winners and which are the losers? Again, it's similar to saying you can predict when the trend starts and when the trend ends.
The ones that move in your direction are winners and the others are losers. No one said anything about a trend, with 99% accuracy take a few pips on each winner and cut the losers and you're set.
  • #12
  • Dec 21, 2010 7:06am Dec 21, 2010 7:06am
Quoting wguan
I'll have to politely disagree with you. From my modest understanding of price movement, it is close to a fact from my own experience that it's newly impossible to have a entry system where price will move in your direction once you enter.
...
That particular belief is incorrect and will, I believe, hold you back, at least on sub-hourly time frames. (I assume you meant "nearly" rather than "newly.")

Try to replace your absolute, deterministic references such as "price will move" and "once you enter" and "99% accurate" (why 99%?) with more relative, probabilistic references such as "with relatively little or no heat" and "within the same mini-swing" and "more likely than not."

Trading is a business of managing odds / probabilities over time, among other things. In the realm of short-term, intraday trading, executing entries to minimize heat (immediate adverse price extension) is both a desirable and realistic objective.

As an example, pure scalpers seek to do just that with every single entry, by design.

More broadly -- and this is what I do most of the time -- see if you can explore limiting your entries only to a failure (confirmed or, better yet, anticipated) of a retest of a prior fractal high/low or S/R level or range breakout. You are generally fading the most recent micro-trend. Think of it as essentially a scalping entry with a tight stop (and correspondingly less constrained MM), followed either by a fast (minutes) SL or by an intraday (minutes to tens of minutes to hours) trade management and 2 or 3 TPs.
  • #13
  • Dec 21, 2010 7:08am Dec 21, 2010 7:08am
Quoting wguan
I also want to point out about the idea of the coin flipping game proposed by ronald raygun. I have yet to have the time to try it, but any input on the usefulness of that would also be beneficial for anyone.
imo

This game is pointless because you would exit immediately on an wrong entry (wrong entry by your opinion). You would be left with your real entries and MM. And this is already what you are doing.

The game is more of an approach: Can you tell in any time where the market is going?
  • #14
  • Dec 21, 2010 7:15am Dec 21, 2010 7:15am
Quoting wguan
And even if you did have a system that proves to be 99% accurate in terms of price moving in your direction after entry, how is it possible to determine which are the winners and which are the losers?
I don't have to predict anything, I'd close my position after 20 pips in my favor.

Now, look. The easiest way to trade is to understand how the market moves, when it moves and which are the signs before of a movement begins or for the continuation of a movement. When you figure this out and most of your trades have a bigger chance of being winners (because you timed the market!!!), the exit is not a issue anymore. When to exit is moronic. You can exit using ATR, S/R levels, cycles of Saturn or if it rains.

The example of Raygun is bullshit and doesn't address the problem. It uses false assumptions by treating the market as random. Sadly it is not the only stupidity he posted on the forum anyway.
  • #15
  • Dec 21, 2010 7:17am Dec 21, 2010 7:17am
Quoting Sauron
I don't have to predict anything, I'd close my position after 20 pips in my favor.

Now, look. The easiest way to trade is to understand how the market moves, when it moves and which are the signs before of a movement begins or for the continuation of a movement. When you figure this out and most of your...
is your stop 7 pips or 10 pips?
  • #16
  • Dec 21, 2010 7:31am Dec 21, 2010 7:31am
Quoting stimpy
is your stop 7 pips or 10 pips?
100 pips. I dislike losing 7 or 10 pips.
  • #17
  • Dec 21, 2010 7:45am Dec 21, 2010 7:45am
Thanks so much for all the pointers, I really need them to improve. And with more people discussing, the more closer in terms of getting the point of MM across.

The main problem I have right now is how to use TP, SL, TS, to complement each other.

Do you guys firstly determine how much you are willing to risk (ie 2% or more) and then adjust SL and Trailing stop?

I was just testing an trending EA. I did not use a Stop loss. Instead I implemented a Trailing stop loss, and i get a back test graph similar to the one attached....

my settings:
TP:100
TS:50
SL:0/ False


I am confused of how those big DD came to be. From my understanding, is it because that they were trades that never reached the Trailing stop to initiate? But then if they never reacher the trailing stop, how would they have been closed out as I do not have a stop loss.
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  • #18
  • Dec 21, 2010 8:00am Dec 21, 2010 8:00am
Quoting wguan
Thanks so much for all the pointers, I really need them to improve. And with more people discussing, the more closer in terms of getting the point of MM across.

The main problem I have right now is how to use TP, SL, TS, to complement each other.

Do you guys firstly determine how much you are willing to risk (ie 2% or more) and then adjust SL and Trailing stop?

I was just testing an trending EA. I did not use a Stop loss. Instead I implemented a Trailing stop loss, and i get a back test graph similar to the one attached....

my settings:
TP:100
TS:50
SL:0/...
obviously the ea doesn't wait for the position to be in profit before trailing a stoploss. it treats a 'no existing stoploss' as being further than your set trail, and so updates the stoploss to the trail dist specified.

Congratulations ScalaFX for coming out of the closet!
  • #19
  • Dec 21, 2010 8:10am Dec 21, 2010 8:10am
Quoting Sauron
100 pips. I dislike losing 7 or 10 pips.
care to share your 60+ % probability system?


thats one of the messed up things with this game.

you have a fixed sl or you let the trade go out to your stop loss but you close the winners before tp or close them far less than your sl

bizarre.
  • #20
  • Dec 21, 2010 8:21am Dec 21, 2010 8:21am
Quoting nubcake
obviously the ea doesn't wait for the position to be in profit before trailing a stoploss. it treats a 'no existing stoploss' as being further than your set trail, and so updates the stoploss to the trail dist specified.

sry, i am not particularly fast in learning ,

another follow up question: are you saying that if i don't put a stoploss, the backtest will simply treat my trailing stop as my stop loss?
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