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

I don't know why you are using 1:1 ratio of risk reward,
thats even money

Would you guys like to get as close to 1:1 risk reward ratio as possible while still holding your edge? It's quite simple.

How often do your take profits get hit and then go on 1-3 or more pips? Let me show you a special secret that will knock your socks off.

TP = (stop * 1.1) rounded up to the nearest .1

EXAMPLES

stop = 25
25.3 = (25 * 1.1) rounded up to the nearest .1

stop = 135
136.4 = (135 * 1.1) rounded up to the nearest .1

1 loss will take you from $1000 to $990 but the subsequent win will take you from $990 to $1000.

This of course requires you to know how often your trades go on past your take profit at least 1-3 pips.

Then again i could be making this all up. It's always good to do your own research on things before you apply them to what you value.

we are trading here aren't we?

when i started out i was quite obssessed with statistics too, probably due to the online gambling on football for couple of years where i did lots of math on spread betting...

anyway, to each his own, the risk one decides to put on each trade depends on how the trade is going, stop-loss or not... my max risk is 0.5% per trade, cos my lot size is always consistent for the given month. that means i have to have 10 straight losers in the same month to reach that 0.5%...

1% is not a myth, but not totally true either. its just a guide, no hard and fast rule...

No it's not...... You are forgetting the spread and commission were they apply.

As to risk reward...... You have to control the risk consistently whether it is 1% , 3% or whatever.... to be able to make money at this game you have to learn to let profits run, in other words achieve rewards that exceed what your risk is... if you risk 1% then your wins should greater than 1% and hopefully much greater... hopefully far more than 2 x your risk. you should aim for returns of 2, 3, 5, even 10 to 20 times risk on the occasion those trades arise.

If you guys want to do some reading and learning about risk management/position sizing you need to check out Van Tharp's book... "The Definitive Guide to Position Sizing"

I don't view 1% money management in terms of a myth or otherwise. It is difficult to establish _absolutely_ its truth, just like it is difficult to dispute the 'myth' that condom prevents STDs and pregnancy. For that 100 people that sweared on it based on experience, there will be a few that experience otherwise.

To many trader, the 1% per trade risked is a 'constraint' no doubt, just like that seat belt/condom that you wish you can do without.

At the end of the day, that 1% money management rule is a responsibility. How much you view it as a responsibility (to yourselves and stakeholders) depends on how you view trading in your life. There is no right or wrong. To a part-time trader who earn his/her income from other profession, and trading is just spare income without which it will have no bearing on himself/herself or his/her stakeholders, then the responsibility argument is just so faint to the extent of irrelevant.

How much responsibility you bring to the table determines the attitude you bring into the market and therefore the risk you assume. You need to find that balance. But in finding that balance, I believe it always pays to start with some responsibility (even the recognition of it) on your part, whether it is in trading or other aspect of lives.

Thanks for the tip of Van Tharp
I will check him out.
btw which book are you refering to?
it apear he have written a lot of books.

The reality is, perhaps, that this works very much better with some styles of trading than with others.

You make it sound as if it's "terribly obvious" that that's so, and that anything different from that would necessarily be laughable (as neatly shown in your smiley!). That style may suit you very well, but there are some other possibilities, too.

For example, if you have a trading method in which the stop-loss for every trade entered is defined according to some specific structure on the chart (e.g. "a couple of pips above/below the previous bar", "a couple of pips above/below some established level of support/resistance" or whatever), and your "take-profit" level is defined in pips as "the same magnitude as the stop-loss, but in the other direction", and can continually win 70% of your trades on that simple basis (without even the need to watch the trades, after entry), that would be a hugely profitable system without "cutting losers short and letting profits ride" necessarily being able to improve it at all.

However instinctively obvious these things may be to those with fixed trading styles, there are always potentially "other ways of being profitable" available, too.

LOL, that's funny. I am actually very conservative. I dare not to use more than 1% on any trade.

Like Razor said, "you are trading what the market will give you"

If you understand the levels and why the price is moving to those levels then you just take the trade, even if the risk is 4 to 1 against (I try to avoid those trades but if the gap is there I will take it).

You must build a method you are comfortable with then trade it accordingly.

I find this thread interesting and money magagment is something we should think more about and maybe further develop, there are many models of MM, here is my view and ideas, something to think about might be the trades you must win to dig your self out of the hole you created,

example with the standard model I think is used by most traders,
is the 2 % rule or to never risk more than 2% on any given trade.

you have a 20 pip stoploss and 10000 dollars on your acount,
you got stopped out and loose 20 pips = 200 dollars
to get back to brake even you must now win back 20 pips,
so the next trade would be a maximum 19.8 pip stop
lest say you got stopped out again so now you are down 398 dollars,
in the next trade you will have to win back 398 or 39,8 pips to get to brake even. so far we are well within the risk reward of minimum 2:1
but lets say you got stopped out 5 times in a row,
first trade 20 pips
second trade 19.8 pips
third trade 91,2 pips
fourth trade 18,2
the point here is you are decreasing your risk each time, so it will be harder and harder to get out of the hole the more you decrease,
because you also decrease the size amount each time you loose,
so are the 2:1 ratio going to cut it?
I really doubt that very much,
as I see it you either must bet more or risk more to get out of the hole,
or you must have a trading system that win alot! more than 50%
to get out of this situation and then we are into dangerous waters.
so do you guys think this make any sense?

It's important to make a distinction between money management (i.e. position size and method) and trade management (i.e. exit). Viewed this way, aiming for 1:1, 2:1, 3:1, etc RR is TM, not MM. The location of your initial SL should be set according to technical considerations (TM); only then should you set your position size according to the MM that you use.

TM can provide or enhance a methodological edge, whereas MM can't. Whether you risk 1%, 2%, 3%, ..... of your account on each trade has no bearing on your method's expectancy; position size increases both trade risk and return in like proportion, and hence increasing position size increases risk of ruin. Expectancy, in contrast, is determined by the efficacy of your entries and exits.

Expectancy determines whether your equity curve ultimately slopes upward or downward; MM, or position sizing, determines the steepness of the slope.

The primary goal of MM must always be capital preservation. The secondary goal is to maximize equity growth while nonetheless keeping maximal drawdown at a personally acceptable level. Monte Carlo type simulations can assist with finding optimal position size.

Using progressive sizing (e.g. Martingale, d'Alembert, Labouchere, Guetting, etc), or indeed varying sizing in any way, brings no long-term benefit, unless you are somehow able to have the higher position sizes coincide with winning trades. In other words, you'd need to know in advance which trades would be more likely to be winners, and increase the stakes commensurately. If this is not possible, then there is no valid reason to move away from conservative and consistent position sizes, e.g. 1% per trade. The attached spreadsheet allows you to experiment with different staking systems (MM). Use it to prove to yourself that no matter what system you use, it does not alter overall expectancy.

IMO that is exactly the way that it should be. If a trader is in a hole, then he should be asking serious questions as to why. Maybe his method lacks positive expectancy, in which case he'll only dig himself deeper, no matter how he sizes his positions. Or if market conditions are temporarily unfavorable (e.g. ranging markets for a trend following approach), then it might be better to sit tight, as sizing more aggressively will plunge him into deeper drawdown while conditions remain unfavorable (I believe gamblers call this "throwing good money after bad"). It goes without saying that market behavior and probabilities are not going to suddenly change, out of sympathy for the fact that one insignificant retail trader is in drawdown.

Ryan Jones' excellent book encouraged me to look at a number of different sizing systems (there's also a good thread here). In the end, I learned that each system was merely trading off risk against return, or one kind of risk against another. I still believe that consistent fixed frac is as good as any. Reasons:

1. The compounding effect facilitates exponential account growth, while risk is kept constant. Risking 2% of $10,000 is mathematically no different to risking 2% of $1,000,000 (even though there may be psychological or practical reasons as to why you'd want to reduce trade risk, as financial freedom draws nigh).

2. Conversely, position sizes contract (in terms of absolute dollars) if the account moves into drawdown, which is important for the reasons that I gave. Mathematically, diminishing value means that your account will never reach absolute zero, although it's obvious that at some point drawdown is, to all practical purposes, irretrievable.


Hence I disagree with the original poster's statement that "1% MM is a myth". Despite the fact that fixed frac creates the recovery 'problem' he describes (e.g. it takes 25% growth to recover from 20% drawdown), something in the ballpark of 1% risk per trade is very good MM, for the reasons that I've given.

David

BTW, the opposite of win is lose, not loose. Loose is the opposite of tight.

this thread starter is brilliant and smart.

they are all myth! take it or leave it. There is a distinct information traders do not know as at now. As soon a a trader gets that info, he is 99% FREE from the speculation race and remain anonymous to the public; others think they already have it, but they don't! Unfortunately, traders are too lazy to think.

substitute the word "traders" for "most people" Happy new year!

you're right. But that call for the rest 95% that fails. Okay... yes 'Most Traders'.

you will not succeed with a 1:1 RR, it doesnt matter how much you risk. In the long run, its very unlikely that you will be profitable.

as id imagine there is a very small number of people in forex that have a proper capital to use the 1:1 rr rule,as you would need to invest at least 20k in real cash,to do it full time and make it at least worthwile,instead of your daily job,as forex is screen time consuming even to learn the basics it takes many hours watching screen ant trying to make something of the moves.As i believe most retail people are under 10k accounts in forex and using high leverage,that what makes this a casino,not an investment or business.As for my strategy i always use the money that i dont need for trading which means small amounts,so if i was to lose it wont bother me more than day or two.And most times if trade isnt going my way after couple hours its clear enough if i want to let it run or should i think about escaping plan.

In response to the original post, why don't you just come out and say that EVERY single trade is the same and that is why a trader should always trade the same lot size on every trade... and anyone who is an educated trader knows just how ridiculous that is.

The fact is that NOT every trade is the same. Every trade sets up differently, therefore every stop size is different and because stop size dictates lot size that means that lot size would be different for every trade. This is what is referred to as proper money management which is the key to being a successful trader.

Not trying to be a naysayer here. I just believe your statement is incorrect!

Having a strict risk reward is important when learning how to trade. It helps keep you in the game to learn how to trade.

Every entry point is different. If you choose to be patient with your entry's this increases your chances of a better reward then risk. (support and resistance are great risk reward plays) But you have to be patient.

Just an example

Also what time frame do you trade. I trade 5 minute charts as well as daily charts. When I go for a 5 pip trade With a 2 pip spread = stop 3 pips + 2 pip spread take profit 5 pips thats a 1:1 risk reward. With the right entry's
I can beat the odds and profit. I just have to have an edge (don't get me wrong having to cover a 2 pip spread to make five pips with a 3 pip stop is highly difficult but possible. Much more possible then a 1 pip stop + 2 pip spread take profit 6 pips.

Different entry's require different stops to enhance success of any particular trade you may decide to enter.

I personally have a different stop set for every trade i make. As`my way of trading the daily's does not require patience as i set my trades with limit orders and 12 hour expiration. Some of my trades i risk as high as 3 times more then my reward and have a highly profitable system. Keep note though my total risk on any particular trade is 1 %.

not necessarily

You'll make money on a 1:1 Reward to risk system if your success rate per trade is greater than 50%. Position sizing will not change a negative expectancy as previously mentioned (you might think it does because the distribution of the successful trades might trick you but eventually it'll bite you in the ass).

Expectancy = success rate * Reward + (1 - success rate) * Risk

If this is negative then you're losing money. Ultimately your revenue would be less than your expenses.

If you already know your average Pips gained and your average pips lost then you can calculate your break even success rate to make expectancy 0. If your success rate is greater than this you're making money.

Another interesting thing is that success rate and reward to risk have an inverse relationship (at least from my experience perhaps some traders have tremendous entry skills that can prove this wrong).

Would you rather have a system that is right 90% of the time with a Reward to risk ratio of 1:1 or....

a system with a 27% success rate and a 10:1 reward to risk ratio....

My new years resolution for 2012 is to try to add additional positions when the market is trending and I have already established a successful position.

I still have my own reservations about this but conceptually I believe it can turbo charge gains. For instance if the market moves 1000 pips it means it needs to move 500, 600, 700.... on the way to 1000.

Even adding 1 more position early into the original entry's 1000 point move will massively increase total revenue. Once the market is trending I believe that's a good opportunity for higher success rates which means more reward....

I don't know what my reward to risk ratio will be by the end of a trade. I know the move that I am trying to catch and the theoretical reward to risk I would like to obtain.

There's a constant trade off and continuum so simplicity is still the most paramount thing even though it is important to be dynamic. You have to remain oriented and know what move you want to catch and how you're gonna catch it.