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Trade mgmt challenge 8 replies

Trade Explorer - Automated trading with dynamic risk mgmt 0 replies

US 10-y treasury yields went up today - doesn't that mean bearish USD 1 reply

Money Mgmt feature 11 replies

Attachments: USD/CAD went wrong, tips on money mgmt
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USD/CAD went wrong, tips on money mgmt

Quoting bluesteele
Number one problem is your risking 5%. WAY TOO MUCH !

On another note Cesare76fx is bang on. An average system with good MM is the basis of being successful.

Forget the yahoos that brag about their High W/L ratio. A high W/L ratio means nothing.

WOOF !
5% is not too much in relative terms. If you trade less than 20 times a year that is optimal. If oyu trade often then that is way too much.
Fear prevent possibilities, and so does Greed
Quoting Custos
Cause MM is solved rather easily. Just use a fixed fractional approach and decide on a max drawdown you allow, then look that the historical drawdown doesn't go above the threshold. But of course, that requires you to have a system in the first place, otherwise you can't do that.


three of the four things you mentioned all relate to having a system. If the system would be the least important, then why do still most people lose in the long-run? Most people lose, cause they trade crappy systems that just don't have an edge. If you can't beat the...

Sorry but the system does not make the profits the MM does.
And I disagree that MM is solved easily. It's the hardest part of any system and it is the #1 reason traders fail.

A 70 or 80 or 90 % winning system does not equate to profits.
The Best Loser Wins
Quoting Custos

three of the four things you mentioned all relate to having a system. If the system would be the least important, then why do still most people lose in the long-run?
They lose because in the majority they never bothered to learn how to trade and they think that finding a way to predict price direction will make them money, so they blindly follow strategies posted on forums like this one! Strategy really isn't that important, whereas psychology, trade and money management, and discipline are.


Quoting Custos

Most people lose, cause they trade crappy systems that just don't have an edge. If you can't beat the odds or turn the odds on your side, then you won't be able to make profits in the long run.
Even with an edge the majority would still lose, that's already been proven numerous times in various trials!
my view on this is that as stated, the edge is a very hard thing to grasp, even if discovered early on.... you dont really understand it until you UNDERSTAND IT.

now as far as the money management goes since that is your question.

in my opinion the $ risk should be directly dependent on the volatility in two major ways

1) statistical historical volatility
2) current volatility


to give you an example, the Euro/usd

2910 trading days (since inception) can be divided in to quartiles and the mean

minimum range of all time=0
25%< of the time it traded at a range of 77 pips
average= 121 pips
25%> 150 pips
maximum ever range= 546 pips

now establish what the volatility is for the past 24hrs as it is the most current reading.

0.9% volatility ([SD*2+SMA] - [SMA-SD*2])/ SMA , this is the easiest way to obtain a volatility otherwise you would have to obtain the log return, then the daily variance get the sqr of the average .... and so forth. (an even easier way is an hourly chart with a Bollinger Band at setting of 24,2... then you get (TOP BB-LOW BB)/MID BB

you might be wondering what this has to do with money management. Well the premise here is that a tight stop is susceptible to volatility therefore I personally like my stops away from normal volatility and the T/P within volatility but never <1:1 RR ratio.

now adjust your position size to not risk greater than EITHER of these two things

1) the statistical performance of your system if let say you have a 50:50 W/L method then risking 2% per trade would blow your account within normal performance of your system in place.

or

2) do not risk more than the average daily volatility of the pair in question, the reason for this is that if the euro has a normal 1% volatility and you are risking 2% of your account it is tremendously hard to get a return > than the volatility of the pair without over leveraging and becoming susceptible to the volatility at least in my opinion.


However I think you are still not sure on your edge, and if that is the case no amount of money management can save your account.

let's assume you have a random market, (that is a big assumption) then you can expect below open 50% of the time and above open 50% of the time as these are the only scenarios. Now being a random market a system that can give you a positive probability expectation will be in your favor.

but since it is not a random market entirely you have trends, you have clustering, you have kurtosis, heteroskedasticity, and skewness which messes with any rigid system in my opinion.

you have to have a sense of direction, because you are not expecting 50/50 you can have 30/70 or worse so at the end the money management will be a slow painful death by a thousand stops.
AVT INVENIAM VIAM AVT FACIAM
Quoting xtrader101
5% is not too much in relative terms. If you trade less than 20 times a year that is optimal. If oyu trade often then that is way too much.
The frequency of trades has nothing to do with the optimal bet size.

IF you have a profitable system then 5% is probably not too much from a mathematical perspective. But most traders could not live with having 50-70% drawdowns that a high risk% would entail. So they will try to limit drawdowns to 20% which generally means 1-2% risk at most.

The trade-off is between higher returns with high drawdowns and lower returns with lower drawdowns.

So to be clear - the reason to limit risk% to 2% is psychological not mathematical.
All this talk about "an average system". What does that even mean? Define Average. Does that mean if you picked ten systems on ForexFactory at random and picked one in the middle? Does it mean a system that generates an average return? Average return being if you added up the return of every trader in the world and divided the total by the number of traders?

You can't go throwing around the term "average system" when it doesn't really mean anything.

In my opinion the "system" or method of trading is the most important thing. You can't money manage your way into profit with a system that loses more money than it makes.

People rant on and on about money management. What's the big deal? Risk 1% to earn 2% if you're trading the hourly or higher. If you're scalping the M1 chart rish 1% to get 1% and have a high hit rate. There is nothing magical about money management. Just keep your risk low enough for your account to survive a string of losses. As a scalper I would NEVER risk 5% on any trade. I risk between 0.3% and 1% and that's all. If you're trading the daily or weekly, well you're going to have to risk more unless you have a huge account othrwise you're never going to make a living from it.
Quoting jzw
The frequency of trades has nothing to do with the optimal bet size.
I disagree. If you are scalping 60 times per day you can expect to take 10 or 20 losses in a row. Or a string like 3 losses one win, 4 losses 2 wins etc. Risking 5% with that frequency of trades is suicide.
Quoting Roofx
I disagree. If you are scalping 60 times per day you can expect to take 10 or 20 losses in a row. Or a string like 3 losses one win, 4 losses 2 wins etc. Risking 5% with that frequency of trades is suicide.
Expand that 60 times per day to per month/quarter/yr.... Same results. Blowout.
The Best Loser Wins
Quoting jzw

So to be clear - the reason to limit risk% to 2% is psychological not mathematical.
I believe that to be true.
When the Joker is in the deck.. fear not and play it well
Quoting Roofx
If you are scalping 60 times per day
I really don't need to work/sweat that hard.
When the Joker is in the deck.. fear not and play it well
Ok, two things:


1) I wanted to chime in here and say the people who said 5% is too much are correct....but not quite because the risk is too high on its own; You are risking too much without having first established a 'system' expectancy.

By 'system' I mean your trade signals and rules. Not just money management, but what tells you to get in and what tells you to get out. If you can't define that down to a precise rule, you can't test your rules against market data, and you can't begin to judge what's appropriate money management given the expected outcome.

5% might very well be acceptable, should it fit into a system where there isn't a high chance of taking consecutive losses. (Though, I don't know of many that fit, I'm just speaking "theory trade here", for a practical number we'd be talking more in the 0.5%-2% range.)

2) If you're trading on our own discretion, that is, without a rule based system and more on what "looks/feels" good to you at the moment. I would first say that most new traders fail hard this way, but if you must learn this lesson then at least do yourself the favour of establishing at what price level you're clearly wrong and stick to it by setting a hard stop. Not just "because it hit my 5% equity drawdown"... but in what cases are you clearly wrong before you lose 5% (again, just using the % you gave, I personally think this number needs to be lower.)

For instance, if you enter a trade and it immediately moves against you hard, like, spiking price hard, is that something you expected to happen (obviously no, else you would have waited for the spike before entering) so right off the bat your interpretation of the market may be flawed and you should be looking for a way to get out cheaply in case the momentum continues. Minimizing losses (preserving capital) is paramount for professional traders.
FXGears.com
Quoting Jack_Larkin
Ok, two things:


1) I wanted to chime in here and say the people who said 5% is too much are correct....but not quite ....
The post is fairly well said. Perhaps it depends on your experience/system/method. The less experience you have the lower the risk until you "know" you're getting it right.

Then, 5 or 6% risk is not too much (IMHO)

(and that's all it is; an opinion)
When the Joker is in the deck.. fear not and play it well
Quoting Slim Buffett
The post is fairly well said. Perhaps it depends on your experience/system/method. The less experience you have the lower the risk until you "know" you're getting it right.

Then, 5 or 6% risk is not too much (IMHO)

(and that's all it is; an opinion)
In my post I do mention that I think 5% is too high.. I was just qualifying it with a few reasons it could be deemed too high before we even touched proper money management.

I'm a firm believer that if you wouldn't trade a $100k account with 5% risk then you have no business trading a $100 account with 5% risk. No one gets to trading large by building bad habits trading small.
FXGears.com
Quoting Jack_Larkin

I'm a firm believer that if you wouldn't trade a $100k account with 5% risk then you have no business trading a $100 account with 5% risk. No one gets to trading large by building bad habits trading small.
I agree and I wasn't trying to argue. As I said, maybe it depends on experience and so forth. On the other hand, if you started with a $100 account and always risked 5-6%, it would be the norm.

What I know is what has worked best for me. It involves risking more than 1 or 2%. If I "think" I see a great trade I'll (as someone said) back the truck up.
Trading manually is really more about common sense than any system/method. We use a system to try and make some sense of it. Neither always prevails so it's a combination of system and common sense.

Again, just an opinion.
When the Joker is in the deck.. fear not and play it well
No worries Was just trying to be clear.
FXGears.com
Quoting Jack_Larkin
No worries Was just trying to be clear.
Likewise.
The very best of trading to you.
When the Joker is in the deck.. fear not and play it well
Quoting Svm
I’m still new to trading so I’m trying to get the right psychological mind set for this.

I made a trade yesterday by shorting USD/CAD. The mistake (and I’m not sure how to fix this yet) was the Stop Limit (SL) was 80 pips. The reason I kept it so much is because I have seen high volatilities in this currency pair before and have hit SL before. Please note that I didn’t put more than 5% of account equity at stake (on this trade or any other trade)

I placed a trade of two lots and it went against me. After that I got into position knowing...
If you go short by that chart I can say you're going with your guts only and that is dangerous. Read the background first for US & CAD, US is in positive expectation of recovery (could lead to stronger bullish support for USD) and Canadian is more or less like UK condition thesedays, not too bad but also not too good. So, I think USD/CAD has stronger bullish pressure than bearish, but with greater portion of sideways and whipsaw.

If I can suggest, why pushing your luck with that kind of choppy market? Why not choose clearer pairs such USD/JPY long or AUD/USD short, or may be if you already have deep understanding about market you can watch closely for long opportunity at EUR/AUD & GBP/AUD crosses. If you want to trade currency, understand their economic background first so you can sure your position will be backed up by large amount of trader out there
Quoting bluesteele
Sorry but the system does not make the profits the MM does.
And I disagree that MM is solved easily. It's the hardest part of any system and it is the #1 reason traders fail.

A 70 or 80 or 90 % winning system does not equate to profits.
can you please tell me again, when did I say that a high win-rate is needed for profits? I think you don't quite understand what a positive expectancy system is comprised of.
It's funny how people just interpret stuff into my posts. And MM is still the easiest part of the equation.
Quoting pipmutt
They lose because in the majority they never bothered to learn how to trade and they think that finding a way to predict price direction will make them money, so they blindly follow strategies posted on forums like this one! Strategy really isn't that important, whereas psychology, trade and money management, and discipline are.
yeah, discipline does have its place as does money management. But if the odds are not in your favor, you can execute your trade plan with the best discipline and the most conservative money management and still end up negative. That's reality. I don't know why it is so hard for some people to understand this.

Quoting pipmutt
Even with an edge the majority would still lose, that's already been proven numerous times in various trials!
Can you point me to some of those trials? (Except the turtle trader example)
Quoting Custos

yeah, discipline does have its place as does money management. But if the odds are not in your favor, you can execute your trade plan with the best discipline and the most conservative money management and still end up negative. That's reality. I don't know why it is so hard for some people to understand this.
The 'odds' are in having a plan, executing it with money and trade management and discipline and confidence. These are the only things we can be fully in control of. A strategy only gives us a directional bias to help us decide which way to trade but as it's based on probabilities we're never going to be in control of the outcome. If we can't control the outcome what does that leave us with? Statistics help but they're no guarantee. Even with a statistically proven profitable system the majority would still lose overall.

Quoting Custos

Can you point me to some of those trials? (Except the turtle trader example)
There was a fad for these types of experiments, for example Ralph Vince did one (commented on by Van Tharp), there are dozens of similar examples just google.
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