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Let's talk money management

  • #21
  • Mar 2, 2011 3:14pm Mar 2, 2011 3:14pm
I found this calculator to be very helpful:

http://www.earnforex.com/position-size-calculator

Now I can easily adjust the lot size up or down for trend / counter trend trading and for the Risk:Reward ratio.
  • #22
  • Mar 2, 2011 3:45pm Mar 2, 2011 3:45pm
You can open several demo accounts and jut try trading different volumes.

When starting real trading it is better not to open large positions but on a demo account we can afford anything.
  • #23
  • Mar 3, 2011 9:56pm Mar 3, 2011 9:56pm
definitely 2-3% max per trade of your capital....
  • #24
  • Mar 9, 2011 3:32am Mar 9, 2011 3:32am
Quoting ikur1
definitely 2-3% max per trade of your capital....
Inserted Video


start at 2 minutes and it explains how to figure out your lot size based on your risk
  • #25
  • Mar 9, 2011 3:34am Mar 9, 2011 3:34am
trading platforms should do this for us =)
  • #26
  • Mar 12, 2011 9:18am Mar 12, 2011 9:18am
Based on comments and a couple of links from Hanover, I am experimenting with adjusted lot sizes based on the conditions of my trades.

First, I determine if my trade is a trend or a counter–trend trade. Secondly, I set a stop-loss. Thirdly, I estimate an entry point. And finally, I estimate a take-profit level.

I am currently experimenting with a 5% risk level based on the account size and the difference between the s/l and estimated entry point.

I can use this position calculator to establish a “base” lot size (BLS).
http://www.earnforex.com/position-size-calculator

Next, I calculate the estimated Risk: Reward ratio (R:R).

Now I am ready to calculate the Adjusted Lot Size (ALS).
If the Trade is counter-trend, then reduce the Base Lot Size by 60% (BLS * 0.4 = ALS).

Lastly, adjust the lot size for the risk: reward ratio. If the position is not reduced for counter-trend trading and the R:R is greater than 1.4, then I will increase the position size by 50%.

1) If the R:R < 0.8 = No trade
2) If the R:R > 0.8 and < 1.4 = 1.0 * Base Lot size
3) If the R:R > 1.4 = 1.5 * ALS

However, I don't have enough data to calculate a win/loss ratio (# of winning trades / total # of trades) or winning probability (average winner / average loser).

What's your experience with the win/loss ratio and the winning proability?
  • #27
  • Mar 12, 2011 11:41am Mar 12, 2011 11:41am
Quoting UgoDadeo
Based on comments and a couple of links from Hanover, I am experimenting with adjusted lot sizes based on the conditions of my trades.

First, I determine if my trade is a trend or a counter–trend trade. Secondly, I set a stop-loss. Thirdly, I estimate an entry point. And finally, I estimate a take-profit level.

[color=black][font=Verdana]I am currently experimenting with a 5% risk level based on the account...
You're thinking way too much into this. The market isn't based on scientific algorithms. Its base purely on trader's emotion and economic releases.

Instead of trying to figure out a quantum physics equations, how about putting all your energy in learning, what moves the market.

Risk and Reward is easy, just keep your monetary exposure small. This is money management and risk control. Smaller amount you invest in the market the better chance you're equity will survive to trade another day, no matter what the outcome of the trade is.

BTW, there is not equation for trading probability. Trading is not like a 9-5 job. Some days you make money while other days you'll lose money. What determines how many more winning days you'll have over the losing days depends on you and how you see the market. How you see & react to the market, your intuition, and blind luck is the secret to trading.
  • #28
  • Edited 6:39pm Mar 12, 2011 6:24pm | Edited 6:39pm
Quoting Jhig
Risk and Reward is easy, just keep your monetary exposure small. This is money management and risk control. Smaller amount you invest in the market the better chance you're equity will survive to trade another day, no matter what the outcome of the trade is.
This is exactly the issue that I am exploring now.

You see, I don't think the point is to trade. The point is to make a profit. I think keeping the "monetary exposure small" harms your returns. Of course the obvious answer of betting it all on one trade doesn't make sense (unless you happen to get it right ). But staking 0.001% is just as foolish. I think the right answer must be between 1 - 5% -- with the best answer settling around 3%. This assumes that "a system" can win 50% of the time and average better than 1 times it's losses.


Quoting Jhig
BTW, there is not equation for trading probability. Trading is not like a 9-5 job. Some days you make money while other days you'll lose money. What determines how many more winning days you'll have over the losing days depends on you and how you see the market. How you see & react to the market, your intuition, and blind luck is the secret to trading.
Well, I'll certainly take help from anywhere I can get it including blind luck . And I agree there is no substitute for experience and a willingness to learn. But I suspect that understanding a system and price action combined with trade management and money management are far better than shooting from the hip.

Quoting Jhig
BTW, there is not equation for trading probability.
I probably didn't communicate these terms very well. Here's a neat calculator Hanover linked earlier (the terms come from here):

http://www.hquotes.com/tradehard/simulator.html

It's all fun!
  • #29
  • Mar 13, 2011 9:00am Mar 13, 2011 9:00am
Quoting UgoDadeo
This is exactly the issue that I am exploring now.

You see, I don't think the point is to trade. The point is to make a profit. I think keeping the "monetary exposure small" harms your returns. Of course the obvious answer of betting it all on one trade doesn't make sense (unless you happen to get it right ). But staking 0.001% is just as foolish. I think the right answer must be between 1 - 5% -- with the best answer settling around 3%. This assumes that "a system" can win 50% of the time and average better than 1 times it's losses....
Make a profit... yes otherwise why do it? Trading is just the opportunity to do so. So as we all know opportunities are here one minute gone the next. You're exposure is only the size of an opportunity and gets larger the more opportunities there are.

But you also have to keep your eye on the number of opportunities you take, because too much too fast could take you down as well.

I think if you trade based on the number of opportunities the harm you speak of is irrelevant. You start forcing trades or taking larger positions because of this mentality of "small exposure" and it can be even more ruinous than had you traded with small exposure.

If your win rate is 50% you can't force it to 60% or higher. 50% win is a flip of the coin. Your time spent increasing your win rate would be more beneficial.
  • #30
  • Mar 13, 2011 10:33am Mar 13, 2011 10:33am
Quoting pip_seeker
But you also have to keep your eye on the number of opportunities you take, because too much too fast could take you down as well.

This is a very good point. And an easy trap to fall into.

Quoting pip_seeker
If your win rate is 50% you can't force it to 60% or higher. 50% win is a flip of the coin. Your time spent increasing your win rate would be more beneficial.


I agree with you. I am simply experimenting with the money management side of the equation. If we agree that someone has a system and it is well suited to that person (timeframe, personality, confidence, etc.) then does it stand to reason that there is an “optimal” money management plan for that person and their system?


I can see where someone just starting out should take it easy. No doubt about this. And on the other end of the scale, I can see where an account is soooo big that there is simply no point in taking risk. That person is now in the “stay rich” position.

If you spend time and effort developing your own “best system” and you don’t maximize the money management side of the plan then you are leaving good money on the table.
  • #31
  • Mar 13, 2011 12:46pm Mar 13, 2011 12:46pm
I did something a little different in regards to MM.

I took my average loss in pips, then figured how much I should trade. Taking into account how much loss I am willing to sustain. After I knew how much I should trade I turned it into a percentage of my account. This way I can change the number of lots I want to trade easily.

Example.

Account size:
5000

Avg Loss(pips):
15

Avg Loss(%):
3

Lots size traded:
1 Standard Lot

Percent of account traded:
20

The difficult part for new traders, is to wait until they have a large enough trade pool to know what their average loss is. Guessing is not good enough.

One other thing to mention is my stop loss is the only thing that varies from trade to trade(until I move up in size). Whereas, the other method varies the Lot size and the stop loss. I find it much easier and less confusing to vary my SL only. Both methods should be equivalent, I just prefer mine.
  • #32
  • Mar 14, 2011 6:17am Mar 14, 2011 6:17am
Quoting UgoDadeo
I can see where someone just starting out should take it easy. No doubt about this. And on the other end of the scale, I can see where an account is soooo big that there is simply no point in taking risk. That person is now in the “stay rich” position.

If you spend time and effort developing your own “best system” and you don’t maximize the money management side of the plan then you are leaving good money on the table.

I think you continue looking for gains. "Stay rich" needs growth just like any other category, but the object might change to charity rather than profit only.

You know I've gone thru the "best system" a number of times and there comes a point that tweaks and other system modification add-ons to try to keep from leaving good money on the table as you suggest becomes a misnomer.

I don't know if this is a phase I have come to or what, but once you hit a certain profit ratio or a certain percentage gain every month you begin to not care so much about trades that got away from you.

New opportunities are always just around the corner.
  • #33
  • Mar 14, 2011 9:47am Mar 14, 2011 9:47am
Try to open demo account with money u want to deposit so u will know how much you can earn or lost , there is fact that 90% of traders lost there first account but maybe you will be in 10%

Try for start 500-1000$ demo account when u enter go with 0.10 so your pip will be 1$ risk 3% per trade enjoy and happy pips
  • #34
  • Mar 14, 2011 1:00pm Mar 14, 2011 1:00pm
Quoting fxtrendtrade
Hi

perfect risk and money management rules:

-no more than 2% risk on trade
-high accuracy entries with small stop as much as possible
-trailing risk (3 targets and one stop....so for example when the price reach 1 target i move stop to BE (and close 1lot) ,when reach 2 target i move stop to previous 1target(close another lot) if the price go to another 3 target i close the last lot....)-scale position for partial profits
-fixed STOP AND ONE TARGET is murder of yourself in trading
-you can use bigger leverage if you have right rules of management...
Thanks for this suggestion.

The trailing risk strategy is a very good idea. In demo trading, I have watched trades up $ 1200.00 drop to $ 100.00 or less winners on several occasions.

If you trade 1 standard lot, can you sell 0.40 lots. Or, do you have to enter 10 mini's and then scale the positon of profits?
  • #35
  • Sep 22, 2011 11:43am Sep 22, 2011 11:43am
Quoting hanover
The calculation is:

#lots = Acct_ size$ x %risk_per_trade x 0.1 / stoploss_pips

Example:
Acct_size$ = $25,000
%risk_per_trade = 2% = 0.02
stoploss_pips = 50 pips from entry

Result = 25,000 x 0.02 x 0.1 / 50 = 1 lot.

In other words, if you're comfortable risking 2% (that's $500 loss per trade), with a 50 pip SL, then 1 lot is a reasonable pos size for a $25k account.

Plug in your own numbers and get your own result.

Leverage is irrelevant, and merely determines whether or not you have the margin needed to make the trade.
Exactly correct, hanover, according to my Position Size Calculator. Since I stated using this, I don't know how I traded without it; really valuable as my system gives me various distances between entry and stop loss, so every position entered is a different size but RISK is ALWAYS the SAME.

This has made a huge difference in my trading, that and listening to TRADING IN THE ZONE on my iPhone, but that's another thread.

Anyway, just bump this thread up, I'm sure there must be some out there need help to understand why they should trade using variable POSITION SIZE rather than fixed stop loss or fixed position size.

Attached Image (click to enlarge)
Click to Enlarge Name: calc.jpg Size: 80 KB
It takes a lot for me to IGNORE you, but you can try.
  • #36
  • Sep 25, 2011 2:34pm Sep 25, 2011 2:34pm
The real definition of money management is really "profit management." when you guys talk about losses, money management has nothing to do with losses. "loss management" is under the definition of risk management.
  • #37
  • Sep 25, 2011 7:16pm Sep 25, 2011 7:16pm
Quoting PipPipPip
The real definition of money management is really "profit management." when you guys talk about losses, money management has nothing to do with losses. "loss management" is under the definition of risk management.

Losses and money management go hand in hand... if losses exceed the money you have then you have no money to manage.

You can call a spade a spade or a spade a shovel or shovel a spade does it really change what it is because you disagree.

Risk definitely plays a part as well, but that is an entirely different concept IMHO.
  • #38
  • Sep 25, 2011 7:46pm Sep 25, 2011 7:46pm
Quoting pip_seeker
Losses and money management go hand in hand... if losses exceed the money you have then you have no money to manage.

You can call a spade a spade or a spade a shovel or shovel a spade does it really change what it is because you disagree.

Risk definitely plays a part as well, but that is an entirely different concept IMHO.
A system must be based on some form of sound reasoning and logic. It must have two essential components:
1. It must get you out of a position quickly if you have made the wrong decision.
2. It must allow you to let profitable trades run.
These two principles are completely opposite to your natural instincts. It is unnatural for you to get out of a losing position, because you are praying and hoping for a recovery – you hate being a ‘loser’ and would rather regain some of the loss. If you cover the position, all hope has been abandoned forever (human nature always has hope).

In the market we are like the cat with nine lives – maybe you have lost one, but you have eight others to live for. In using your system, you must not only accept losses, but also expect them. If you accept this, then you must have a system that limits losses.

In the case of a trading system, we can say that:

Risk management is loss management.

And

Money management is profit management.


A good system combines both of these principles, where losses are cut short and profits are allowed to run. It is the sudden decisions to by-pass your system and do your own thing in mid-stream that will make your trading undisciplined and vulnerable to losses. Your "own thing" is usually wrong because it will be based on an emotional response. No two traders are alike; no two have the same resources and needs. You need to develop your own system, tailored specially to your own trading style – in other words a system that suits you.

To trade strictly within a system, with no real profit or loss involved, also requires a special type of personality. Discipline is needed to be a successful trader when the trading is for real. Those traders who cannot paper trade in the first place can be warned well in advance that they are unlikely to be successful trading the stock market. They lack the skills needed. You need patience, practice, experience, knowledge, discipline, concentration, dedication and an uncontrollable urge to be successful.
  • #39
  • Sep 26, 2011 7:51am Sep 26, 2011 7:51am
Quoting PipPipPip
In the case of a trading system, we can say that:

Risk management is loss management.

And

Money management is profit management.


A good system...

If you have a system that works based on these principles then there's no problem but I can tell you this is not the only way to look at it to find success.

Anything is possible... the forex market knows no favorites.

Risk management can be failure management... or odds of failure if you will. Usually the larger your lot size the greater the odds of failure. Another form of risk management is trade placement or order placement. And another form of risk management is time. Time in trade, time out of trade.

If you only look at the market in 1 dimension that's all you'll see.

Apply loss management using the same principles... because in the end you can't manage any money if you don't have any to manage.

I'm not saying you are wrong... because if you're profitable that's all that matters anyway. But if you look more closely you might discover a whole new world.
  • #40
  • Sep 26, 2011 10:04am Sep 26, 2011 10:04am
I heard this sentence often "The market does what it wants, when it wants" and people are talking about risk management and money management. I think it is very important to play small amounts to avoid losing too much, but some traders want to trade big and win big when they are right and/or lucky.

Knowing that market does whatever it wants, how pertinent is money management of 2% or 5% of an account vs 15% to 25% when we know most people uses signals and systems that works 60% of the time, so they win more often then they lose. Wouldn't the overall profit be bigger? Or is it the best way to wipe clean your account?
Wax on.... wax off....
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