Lets talk money management! | Forex Factory

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Lets talk money management!

  • #1
  • First Post: Jun 15, 2011 10:22pm Jun 15, 2011 10:22pm
Alright, I assume all of us know the importance of money management in this game. But, not much is discussed THOROUGHLY on this topic.

Well, so far I , with my limited knowledge, have only discovered 2 types of money management in this game. Fixed fractional and fixed ratio. I believe individual preference among these 2 options lay down to the understanding of each of their ups and downs.

So I suppose there is a need to discuss/debate about the advantages/disadvantages of using Fixed fractional/fixed ratio MM. :nerd:

Sorry for my ignorance if this topic is considered not worthy.
  • #2
  • Jun 15, 2011 10:35pm Jun 15, 2011 10:35pm
Read Van Tharp's book... "The Definitive Guide to Position Sizing"
There is a free PDF available if you google it.
  • #3
  • Jun 15, 2011 10:50pm Jun 15, 2011 10:50pm
Quoting tradestar1
Read Van Tharp's book... "The Definitive Guide to Position Sizing"
There is a free PDF available if you google it.
and what this book says? I mean what's the basic principle?
The Thief of Wall Street
  • #4
  • Jun 15, 2011 11:52pm Jun 15, 2011 11:52pm
I think the title is pretty self descriptive. Van Tharp goes into detail regarding evaluating your system and money management aka position sizing, in fact many different models.
I won't be giving a book report here so if your interested you can google it or buy the book from Tharp or Amazon or whoever.
I will say it is a very complete book and a bit tedious to get through.
  • #5
  • Jun 16, 2011 12:25am Jun 16, 2011 12:25am
Quoting tradestar1
I think the title is pretty self descriptive. Van Tharp goes into detail regarding evaluating your system and money management aka position sizing, in fact many different models.
I won't be giving a book report here so if your interested you can google it or buy the book from Tharp or Amazon or whoever.
I will say it is a very complete book and a bit tedious to get through.
Thanks traderstar1 I will get myself 1 copy of it. We shall discuss about it soon..
  • #6
  • Jun 16, 2011 2:52am Jun 16, 2011 2:52am
Quoting p.warrior
Alright, I assume all of us know the importance of money management in this game. But, not much is discussed THOROUGHLY on this topic.

Well, so far I , with my limited knowledge, have only discovered 2 types of money management in this game. Fixed fractional and fixed ratio. I believe individual preference among these 2 options lay down to the understanding of each of their ups and downs.

So I suppose there is a need to discuss/debate about the advantages/disadvantages of using Fixed fractional/fixed ratio MM. :nerd:

Sorry for my ignorance...
Learn to trade consistently profitably first I think. Too much emphasis is placed on never entering trades less than a 3-1 reward risk ratio.

Keep an open mind, outdated rukes can stifle the learning process.

If you can trade with an 80% plus win rate then a 40 pip risk for a 20 pip winner is fine (nett of spread).

20 trades a week, means 16 winners total 320 pips, 4 losers total 160 pips.

depending on the currency pair traded If you enter on a m15 trend 20 pips can often be achieved with little or no drawdown before hitting next SR. 40 pip stop protects you from stop hunting b4 the price reverses in your direction again.

There are numerous ways to skin this cat.

P.S. trading is not a game.
  • #7
  • Jun 16, 2011 5:15am Jun 16, 2011 5:15am
Quoting jag1966
Learn to trade consistently profitably first I think. Too much emphasis is placed on never entering trades less than a 3-1 reward risk ratio.

Keep an open mind, outdated rukes can stifle the learning process.

If you can trade with an 80% plus win rate then a 40 pip risk for a 20 pip winner is fine (nett of spread).

20 trades a week, means 16 winners total 320 pips, 4 losers total 160 pips.

depending on the currency pair traded If you enter on a m15 trend 20 pips can often be achieved with little or no drawdown before hitting next...
I agree to your first point that too much emphasis placed on 3:1 RR ratio is not a good solution.
In fact, I don't use static risk reward ratio. My philosophy is to cut my losses short and my profits will handle themselves nicely.
But the problem with my current knowledge is, I can't trade with a 80% winning rate. Even if i can, i can't guarantee that the profits generated is large enough to outweigh the losses. So a solid money management system is crucial in this case to keep my account alive for the big trend.
I suppose if I have the knowledge/ skill to trade with a 80% winning rate with 2:1 RR ratio as in your example, money management wouldn't be a big problem anymore.
But currently,whilst i am improving in trading, i need a solid money management system to secure my position in this business.
  • #8
  • Jun 16, 2011 5:21am Jun 16, 2011 5:21am
Quoting p.warrior
I agree to your first point that too much emphasis placed on 3:1 RR ratio is not a good solution.
In fact, I don't use static risk reward ratio. My philosophy is to cut my losses short and my profits will handle themselves nicely.
But the problem with my current knowledge is, I can't trade with a 80% winning rate. Even if i can, i can't guarantee that the profits generated is large enough to outweigh the losses. So a solid money management system is crucial in this case to keep my account alive for the big trend.
I suppose if I have the knowledge/...
Point taken, however I would never trade live until I could demo trade profitably anyway. Trading a demo account with the discipline of treating it like trading a live account is part of the education process also.
  • #9
  • Jun 16, 2011 5:57am Jun 16, 2011 5:57am
Quoting jag1966
Point taken, however I would never trade live until I could demo trade profitably anyway. Trading a demo account with the discipline of treating it like trading a live account is part of the education process also.
yep! agree Thanks ~
  • #10
  • Jun 17, 2011 7:07am Jun 17, 2011 7:07am
Quoting jag1966
Point taken, however I would never trade live until I could demo trade profitably anyway. Trading a demo account with the discipline of treating it like trading a live account is part of the education process also.
Yee but then you miss one of the biggest feature in trading, the mental aspect! If you going to trade why not just put a small amount instead for demo trading. I think that demo trading is for testing the platform and not try to trading because you miss the mental aspect and you get into a bad habits of you demo trade.

Happy trading
@materyb
  • #11
  • Jun 17, 2011 12:08pm Jun 17, 2011 12:08pm
Quoting materyb
Yee but then you miss one of the biggest feature in trading, the mental aspect! If you going to trade why not just put a small amount instead for demo trading. I think that demo trading is for testing the platform and not try to trading because you miss the mental aspect and you get into a bad habits of you demo trade.

Happy trading
@materyb
I suppose the core philosophy behind this is to train your mind to disregard money especially in big amount so that you wouldn't be affected emotionally. Us human, when it comes to money, we are easily being affected.
The action of putting a small amount is a delusion. You are trying to ''act'' to ''prove'' to yourself as if you wouldn't be affected by the money ( because that amount is insignificant to you.) This is, in fact,worse than trading with a demo account.
When you can trade a demo account while treating it like a live account. That's when you are ready for the live battle my friend.
  • #12
  • Jun 17, 2011 1:00pm Jun 17, 2011 1:00pm
Quoting p.warrior
I suppose the core philosophy behind this is to train your mind to disregard money especially in big amount so that you wouldn't be affected emotionally. Us human, when it comes to money, we are easily being affected.
The action of putting a small amount is a delusion. You are trying to ''act'' to ''prove'' to yourself as if you wouldn't be affected by the money ( because that amount is insignificant to you.) This is, in fact,worse than trading with a demo account.
When you can trade a demo account while treating it like a live account. That's...
Spot on, thanks, it saved me replying.
  • #13
  • Jun 17, 2011 5:14pm Jun 17, 2011 5:14pm
Quoting p.warrior
I suppose the core philosophy behind this is to train your mind to disregard money especially in big amount so that you wouldn't be affected emotionally. Us human, when it comes to money, we are easily being affected.
The action of putting a small amount is a delusion. You are trying to ''act'' to ''prove'' to yourself as if you wouldn't be affected by the money ( because that amount is insignificant to you.) This is, in fact,worse than trading with a demo account.
When you can trade a demo account while treating it like a live account. That's...
Hallo p.warrior, Ye I agree that of you can make yourself believe that the demo account is real it much better then trading small amounts. But I don’t think that you can “treat” your demo account as a live. And to make yourself believe, is very hard and many don’t have the knowledge to do it. When you trade live with a small account you have at least something to lose and you can’t simulate that feeling with a demo account of you “treat” it like a live.

When you make yourself “believe” I mean that you make the brain believe that it put true a situation as athletes do before a race to prepare themselves. But they have the experience of past action and they know what they going to feel in a special situation, a forex newbie can’t know it. He can only think what he going to feel and human beings are very very bad at anticipate feeling. A small account in a size of 20-30% of salary is good exercise money and can give a good sense of what sort of stress trading is.
  • #14
  • Jun 18, 2011 11:16am Jun 18, 2011 11:16am
Quoting materyb
Hallo p.warrior, Ye I agree that of you can make yourself believe that the demo account is real it much better then trading small amounts. But I don’t think that you can “treat” your demo account as a live. And to make yourself believe, is very hard and many don’t have the knowledge to do it. When you trade live with a small account you have at least something to lose and you can’t simulate that feeling with a demo account of you “treat” it like a live.

When you make yourself “believe” I mean that you make the brain believe that it put true a...
Well, I respect the fact that every single individual has their own way of doing things. If you find this way comfortable and effective to you, then you should continue with it. The best way is always your own way !
As long as you can achieve the end result ( somewhat detach yourself from the materialistic view of trading to an optimum level ) . Then it is considered an effective way to you. But remember, never ever think that you way is the only way! This mindset will blind u !
Honestly, I do think like you when I first started trading. I am a newbie too
  • #15
  • Edited 5:15pm Sep 12, 2011 4:57pm | Edited 5:15pm
Hi, I'm a newbie, I'd like to get the book "The definitive guide to position sizing" you've been talking about. I've searched for a while but every link I find to download it is expired so if anyone have the book could please send to me. My e-mail is [email protected]

Thank you.
  • #16
  • Last Post: Sep 14, 2011 8:40am Sep 14, 2011 8:40am
I don’t think that Bernanke the other FOMC member will set the interest rate to the negative levels. No doubt that America has a debt problem which the whole world will have to face with in the future. Europe is in a middle of a huge crisis and it seems that the world is going back to 2008. The bad news is that the central banks ran out the tools they had on 2008, and therefore their ability to deal with this crisis is narrowed. So don’t expect a negative rate level..
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