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What Is "Proper" Risk/Money/Trade Management?

  • #81
  • Jun 4, 2012 3:49am Jun 4, 2012 3:49am
Quoting No-Luck
Initial position from 0.5% to 1% would be fine to start with. So that you need at least -2000 pips to crash the account.
Thanks No-Luck. I like the .5% better to test the waters. For me that's where micro-lots come in handy.

Thanks again,

FX4
Trade what you see, not what you think or feel. Let the market come to you.
  • #82
  • Jun 4, 2012 4:23am Jun 4, 2012 4:23am
Yeah. I like that way of trading: proper R/M-management and a broker who offers high leverage with the possibiloity to hedge. If you have a good understanding of market structure you can fade or trade the dealer (building positions) without being kicked out too early. Most of the time you make money and trade very similar like a market maker. Then it doesn't matter if it's a trending or ranging market.
  • #83
  • Jun 4, 2012 7:26am Jun 4, 2012 7:26am
Quoting No-Luck
Yeah. I like that way of trading: proper R/M-management and a broker who offers high leverage with the possibiloity to hedge. If you have a good understanding of market structure you can fade or trade the dealer (building positions) without being kicked out too early. Most of the time you make money and trade very similar like a market maker. Then it doesn't matter if it's a trending or ranging market.
Market Structure is so key! Seems to me like you're a dangerous trader, just making money coming and going.

FX4
Trade what you see, not what you think or feel. Let the market come to you.
  • #84
  • Jun 4, 2012 8:06am Jun 4, 2012 8:06am
I have a 400:1 leverage account with a starting capital of $2,000 and if I place a 1 micro lot trade... it is $0.10 per pip.

A stop of 50 pips represents a risk of losing $5.00 which is 0.25% of equity.
In the days of old when sailors were bold, and seldom if ever contented.
  • #85
  • Jun 4, 2012 8:32am Jun 4, 2012 8:32am
Quoting pt49
I have a 400:1 leverage account with a starting capital of $2,000 and if I place a 1 micro lot trade... it is $0.10 per pip.

A stop of 50 pips represents a risk of losing $5.00 which is 0.25% of equity.
Small risk percentage: under 3%. May I ask...do you swing trade or trade longer time-frames like H4 and up? Also, do you have a very specific trading system or are you more of a discretionary trader?

FX4
Trade what you see, not what you think or feel. Let the market come to you.
  • #86
  • Jun 4, 2012 8:40am Jun 4, 2012 8:40am
I agree it should be simply based on what you're willing to lose, using these account calculations can be dangerous. If your not feeling the market and you're not performing well then you really shouldnt be trading with much size at all. Any trading system/idea will go in and out of profitability the key is to recognise when its not working then reduce size. When its working increase size. Well atleast this works for me!
  • #87
  • Jun 4, 2012 8:40am Jun 4, 2012 8:40am
Quote
Small risk percentage: under 3%. May I ask...do you swing trade or trade longer time-frames like H4 and up? Also, do you have a very specific trading system or are you more of a discretionary trader?

FX4
Longer timeframes... I have a thread, see my sig. Everything is explained there.

I got off track Thur/fri last week and scalped over 400 pips out of the market in less than 24 hours to get myself outa trouble.
In the days of old when sailors were bold, and seldom if ever contented.
  • #88
  • Jun 4, 2012 8:43am Jun 4, 2012 8:43am
Quoting wadewade
I agree it should be simply based on what you're willing to lose, using these account calculations can be dangerous. If your not feeling the market and you're not performing well then you really shouldnt be trading with much size at all. Any trading system/idea will go in and out of profitability the key is to recognise when its not working then reduce size. When its working increase size. Well atleast this works for me!
Yes WadeWade,

It should definitely be based on what the trader is willing to lose...

And...

Account calculations can be dangerous if followed without paying attention to how a trader is performing or what the market is doing. Flexibility is key, especially in FX.

And yes...

Reduce exposure when things may not be as in sync as the trader would "expect" or be "used to".

Very good points. Sounds like you've been around.

Thanks,

FX4
Trade what you see, not what you think or feel. Let the market come to you.
  • #89
  • Jun 4, 2012 8:46am Jun 4, 2012 8:46am
Quoting pt49
Longer timeframes... I have a thread, see my sig. Everything is explained there.

I got off track Thur/fri last week and scalped over 400 pips out of the market in less than 24 hours to get myself outa trouble.
Longer time-frames sound like a wise plan.

Did click a link in your signature but didn't spend too much time to see all the detail.

Scalping your way outa trouble...you've got some skills . Would it be safe to assume that you increased your position size to recover?

FX4
Trade what you see, not what you think or feel. Let the market come to you.
  • #90
  • Jun 4, 2012 9:25am Jun 4, 2012 9:25am
Was thinking yesterday it might be a good idea to define some MM terms before going into a particular method. So, I think I'll touch on two basic ones for starters: Drawdown and Expectancy.

FX4
Trade what you see, not what you think or feel. Let the market come to you.
  • #91
  • Edited 4:13pm Jun 4, 2012 11:33am | Edited 4:13pm
When trading leveraged instruments, drawdowns are particularly important. If a trader finds themselves in a potentially hazardous losing position, the best, if not the "only" way to minimize the potential of the drawdown is to reduce exposure, i.e. the position size responsible for the drawdown. If my use of the word "only" is bothersome, please visit Technical Analysis Fallacy, but be sure to open your mind before going there, 'cause it might mess with your thinking/programming that you have now as a trader.

Here is a very simple definition:

Drawdown, at a given point in time, is the lowest point between two highs in the equity curve for the time period being observed.

For example, let's say an account has a balance of $50,000.00, and over the course of the next 2 months, the account suffers a loss that brings the balance down to $35,000.00, but in the third month, the balance goes up to $55,000.00. At that point in time, the amount of the drawdown on the account would be $15,000.00. Now that a new equity high has been established, should the equity dip below that $55,000.00 balance, it would be the beginning of another drawdown condition.

So then, a drawdown in equity occurs whenever the balance goes below an equity high that has been produced. The goal, or course, is to keep these drawdowns to a minimum in size and occurrence.

More to come...


FX4
Trade what you see, not what you think or feel. Let the market come to you.
  • #92
  • Jun 4, 2012 11:59am Jun 4, 2012 11:59am
Quoting FX4Newbies
Thanks No-Luck. I like the .5% better to test the waters. For me that's where micro-lots come in handy.

Thanks again,

FX4
I just tested your suggestion on my systems. Testing waters as you call it made all of my systems less profitable. While psychologically it is comforting to test waters, it seems that in reality one gets less profits.

my 2 cents.
  • #93
  • Edited Jun 5, 2012 8:09am Jun 4, 2012 12:09pm | Edited Jun 5, 2012 8:09am
Quoting Custos
I just tested your suggestion on my systems. Testing waters as you call it made all of my systems less profitable. While psychologically it is comforting to test waters, it seems that in reality one gets less profits.

my 2 cents.
Then it does not work for your style of trading. It is part of a style of trading. It is to be used to see which way the market is moving, then increase the position size when the trader sees the market is confirming the trade-trend direction by what it is doing.. It does have some psychological advantage as well, because it makes it easier to close, rescue or flip if necessary but then again, you are a 100% mechanical trader, right?

If it's not for you, then don't use it. I'm sure you won't anyway if it messes with your bottom line .

FX4
Trade what you see, not what you think or feel. Let the market come to you.
  • #94
  • Jun 4, 2012 12:20pm Jun 4, 2012 12:20pm
Quoting FX4Newbies
Then it does not work for your style of trading. It is to be used to see which way the market is moving, then increase the position size when the trader sees the market is confirming the trade-trend direction by what it is doing.. It does have some psychological advantage as well, because it makes it easier to close, rescue or flip if necessary but then again, you are a 100% mechanical trader, right?
true, and from a psychological standpoint it definitely has its benefits. On the other hand forming an opinion and watching the charts confirming that opinion has the same benefits without risking a dime.
  • #95
  • Edited Jun 5, 2012 8:30am Jun 4, 2012 12:46pm | Edited Jun 5, 2012 8:30am
Quoting Custos
true, and from a psychological standpoint it definitely has its benefits. On the other hand forming an opinion and watching the charts confirming that opinion has the same benefits without risking a dime.
That is also true, but, for some reason, because a trade has been opened, the trader's mind is now more actively and acutely engaged than just observing or watching price action for entry confirmations. The emotional energy that is then in the process gets some heart-mind juices flowing.

All for the price of pennies...instead of putting their "full" position on from the start as many traders do. And, if the trade did go well from the start, easy to increase the position size to recover any profit "lost' from entering with a very small trade. But many traders don't trade that way. They just put on let's say one standard lot, place their stop and take profit then wait...Somewhat of what I like to call a passive style of trading. Not saying anything is wrong with it buy the way. If a trader has limited trading time, then that may be the way for them to go.

FX4
Trade what you see, not what you think or feel. Let the market come to you.
  • #96
  • Edited 5:21pm Jun 5, 2012 10:39am | Edited 5:21pm
Here's another trading statistic that money managers might use: Average Drawdown.

How does it work. You just find the dollar amounts of the actual drawdowns within the time period you are examining, add them together then divide by the number of drawdowns you are using. Some traders will not use a drawdown for this calculation that is smaller than two or three times the size of the average losing trade. Why? If most of your drawdowns are close to the average loss on a trade, then your drawdown statistic will be nothing more than a modified average loss statistic of all your trades. So the average loss can be one statistic and the drawdown can actually be another helpful statistic if those values are omitted.

This average drawdown value can then be used to make other valuable comparisons to act as a "blood test" so to speak of your trading and equity. One good comparison might be to see how it stacks up against the largest drawdown you had during the same period. Could be an indication of the emotional volatility of the trader...my 2 cents there . Market upheaval, perhaps? The regularity of such "off-the-average drawdowns" could be a clue to trader temperament. Would be interesting to hear how such discrepancies would be handled if an automated system were in use. Tweak the strategy? Hmm...maybe...

For those who may be interested, Maximum Drawdown would be the difference between the highest equity value and the lowest equity value prior to a new equity high being made.

I would imagine that a HNWI would want to see these statistics (among others I am sure) before they decide to give their millions to a firm to manage. Floating Drawdowns can also be a big deal.

FX4

P.S. Expectancy still to come...
Trade what you see, not what you think or feel. Let the market come to you.
  • #97
  • Jun 17, 2012 8:22pm Jun 17, 2012 8:22pm
Planning to continue the discussion next week.

FX4
Trade what you see, not what you think or feel. Let the market come to you.
  • #98
  • Edited Jun 20, 2012 3:17am Jun 19, 2012 5:25pm | Edited Jun 20, 2012 3:17am
Hi again...

Continuing with the idea of Expectancy. It was mentioned before that a trader needs to be making money in order to have something to manage. That is what Expectancy is about: helping a trader see if their system has a positive or negative expectation.

The use of this calculation does not necessarily have a "predictive" benefit, but at least it can show a trader if their method is at least profitable. I would think a lesser amount of discretion involved in such a trading method would be the ideal, though it can be done if the trader has developed some degree of consistency in their discretionary approach.

What is needed to check expectancy? Some back-tested results. Go back and record the results of your system had you traded it every time you saw your entry. Testing it during the time you would normally trade would be a plus. The more specific your method the better. The length of time for the back-test would depend on you...the longer the period, the more telling the result; and of course, the more trades in the calculation the better. I would imagine that 100 trades would be a minimal starting point. Some dedicated traders may even go into the thousands (using a manual/automated testing method)...but that all depends on the system, trading style etc...how many trades you decide to use.

Once you have those results, here's the formula:

Expectancy = % Winners x Average Winner - (minus) % Losers x Average Loser

where...

% Winners = No. of Winning Trades / No. of Trades (x100 if you want an actual percentage)

Average Winner ($) = Total Winnings($) / No. of Winning Trades


% Losers = No. of Losing Trades / No. of Trades (x100 if you want an actual percentage)

Average Loser ($) = Total Losses ($) / No. of Losing Trades

NOTE: / = a division sign.


I suppose a trader can choose to use raw pips instead of actual dollars.

You definitely don't want to be trading a system that is giving you a negative expectancy. You might be able to improve the trading system to get better results. In some cases, you might be better off trashing it. Of course, the larger the positive number the better. If it is positive, then the trader should attempt to trade well and follow their system every time. Is back-testing work? Yes. But it's much better than "gambling" with a system and hoping you'll make it. Test that system in your Demo before going Live.

Serious traders are used to doing their homework.

Enjoy the journey ,

FX4
Trade what you see, not what you think or feel. Let the market come to you.
  • #99
  • Edited 3:24am Jun 26, 2012 1:53am | Edited 3:24am
Now that we've touched on how to check your system to see if it is solid enough to give you some + pips, let's go on and discuss the other three aspects:

 

  1. Risk Management

  1. Money Management

  1. Trade Management


I think there are subtle differences between them though they are closely intertwined. Maybe I should throw in Emotional Management but alot has already been said in this thread.

To come...Trade Management.

FX4

Trade what you see, not what you think or feel. Let the market come to you.
  • #100
  • Edited 7:18pm Jun 26, 2012 2:33pm | Edited 7:18pm
Some pointers on Trade Management:

1. Pick the "best" trades per your system. Which ones are the best ones? The ones that have filled most if not all of your conditions.

2. Never let a winner become a loser: + pips are better than - pips. Never let a small/reasonable loser become a drawdown drama.

3. Have a price or set-up that lets you know when the trade is no longer valid: if things have changed since you've entered.

4. If your reason for entering the trade has not changed, hold; don't fold.

From Dongsky (5,6,7):

5. If you see no reason to stay, no need to think twice. (Hope and confusion will set in and freeze you like a deer in headlights).

6. If it is working...if it feels like things are "right" (working according to plan), no need to analyze.

7. If it is working: Don't be greedy; don't be scared...don't think (too much): just ride.

From Hanover (8):

8. Try to decide on your take profit price at the beginning when you're unemotional and still objective.

9. (If it's your style) Bank some profits along the way if that keeps you emotionally positive or if it "covers your risk" so you have a "free ride".

10. Always have your broker's number handy just in case the platform fails and you need to call.


There may be some more good ones to add...

FX4
Trade what you see, not what you think or feel. Let the market come to you.
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