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Money management in reality

  • #1
  • First Post: Apr 3, 2014 4:17am Apr 3, 2014 4:17am
I understand the few keys concepts of "Keep losses low, and let profits run", and also "Take profits whenever you can, trade to make money, not prove I'm right".

I've been thinking on implementing both two yet the information each portrays is contradicting. Following the latter, if I do have multiple TP points (TP1,TP2,TP3 etc), I'm basically earning a little each time I hit my TP zone, but facing a full loss when my SL gets hit, which is the opposite of the first point of keeping losses low.

Anyone can share some insights into this? Or does anyone have good sources of MM books?
  • #2
  • Edited 8:14am Apr 3, 2014 8:03am | Edited 8:14am
Hi Alfis,

I agree with every everything on both axioms except the "Take profits whenever you can" part from the second one. Following the "Take profits whenever you can" rule-of-thumb is an easy way to end up with a large number of small sized winners, and a small number of large losers that may turn expectancy negative (ie, you have a high win% but still end up losing money, explained here: http://www.learntotradethemarket.com...ant-in-trading ).

Here's a nice article on money management with some MM book recommendations in the end: http://www.investopedia.com/articles.../04/051904.asp
(btw I haven't read any of those books. I'm assuming they're good because the article recommending them is good)

While you're at it, read this one too: http://www.tradermike.net/2004/05/tr...01_expectancy/

Cheers,
vox
"To hold, you must first open your hand. Let go." - Lao Tzu
  • #3
  • Apr 3, 2014 8:29am Apr 3, 2014 8:29am
Thanks for both of your comments.

@ Jacob, I've always thought of moving stops to BE and let profits run. But ever since a few occasions where I allow a 100+ pip trade turn into a BE trade, I started questioning myself whether if I'm leaving money on the table or not grabbing my profits when I need to. By moving your SL to BE so often, don't you allow your trades to 'breathe'? 30 pips seems relatively tight compared to the TP you're talking about (200 pips)

@voxdei, I totally get what you're talking about, a number of small winners and a few large losses is detrimental.

Right now still unable to comprehend the idea of allowing the trade to run while ensuring profits are taken
  • #4
  • Apr 3, 2014 8:57am Apr 3, 2014 8:57am
Hi alifis,

I understand completely what you mean about having money on the table and letting turn into BE. I have done that so many times during my career. What has helped me is constantly watching all the currency pairs I trade to get an idea of what constitutes appropriate t/p levels. I understand that if I trade in EurUsd or NzdUsd if I'm up 30-50 pips in one day that's not bad if that's in UsdMxn or UsdZar etc its nothing 300 -400 pips gets my attention. Also if you trade frequent, say daily, then you can't honestly expect to make 100-200 pips in the majors, those are longer term set-ups. For example, I just sold AudUsd at 35 but I'm only looking for a test of the lows, so 30 pips, and just for today. There are some trades I make based on my model that will try and keep in for days sometimes weeks.
Finally, I would feel 100 times worse if I let a winning trade turn into a losing trade versus a BE. I also always feel better that I took a small profit if it turns sour so at least I can say it was a winner. So much of this is psychological endeavor.
  • #5
  • Apr 3, 2014 9:15am Apr 3, 2014 9:15am
Quoting JacobFordFX
Hi alifis, I understand completely what you mean about having money on the table and letting turn into BE. I have done that so many times during my career. What has helped me is constantly watching all the currency pairs I trade to get an idea of what constitutes appropriate t/p levels. I understand that if I trade in EurUsd or NzdUsd if I'm up 30-50 pips in one day that's not bad if that's in UsdMxn or UsdZar etc its nothing 300 -400 pips gets my attention. Also if you trade frequent, say daily, then you can't honestly expect to make 100-200 pips...
I know everyone is different and their methods are different, but curious about this. You choose to take profit at pre determined pip numbers relative to your sl (example risking 20 pips, and I'm looking for 1-2 rr, so your tp is at 40),or do you let structure/support/resistance choose your tp?
  • #6
  • Apr 3, 2014 9:28am Apr 3, 2014 9:28am
My AudUsd short is probably not the best example, I did it because the USD Index made a decisive break through a important resistance level, therefore I sold AudUsd and would have only given it 5 pips (these are just some of my seat of the pants, intuition type of trades). As far as how I structure my trades, I let my model find the trades that are most like to exhibit trending characteristic. As far as stop/loss and take profit levels they are always based on levels that makes sense (recent lows, recent highs, etc.) otherwise I can say I'm going to make this trade 10:1 rr by risking 50 pips to make 500 pips, which is great, but if it doesn't make sense based the currency pair's average volatility (range) overall USD trend, etc it's just a mathematical exercise that anyone can do.
My recent long EurJpy trade, my take profit was 143.75 (a recent high), it got as high as 143.50 while I was asleep. The next day when I got up it was trading around the figure (143.00). I got in at 141.85 and subsequently moved my stop to 142.53 to lock in a profit, 60 pips or so. Now knowing how "I" am seeing the trade stop just 20 pips from making 190 pips there was no way I was only going to make 60pips, so I watched it the next morning to see how it traded and it just didn't feel like it would go higher and that's when I made up my mind to sell it and make 112 pips or so. In mind a descent compromise and I go to bed happy. Again that's me
  • #7
  • Apr 3, 2014 9:31am Apr 3, 2014 9:31am
What helps me are trading axioms that really sum up concisely what the "right" things to do are. I have a category on my website called Trading Quotes, you might it useful. Quotes from some of the best traders spanning over 100 years.
  • #8
  • Apr 3, 2014 9:38am Apr 3, 2014 9:38am
Quoting JacobFordFX
My AudUsd short is probably not the best example, I did it because the USD Index made a decisive break through a important resistance level, therefore I sold AudUsd and would have only given it 5 pips (these are just some of my seat of the pants, intuition type of trades). As far as how I structure my trades, I let my model find the trades that are most like to exhibit trending characteristic. As far as stop/loss and take profit levels they are always based on levels that makes sense (recent lows, recent highs, etc.) otherwise I can say I'm going...
I'm currently on my phone now, will check it out later thanks,! Another question since you mentioned it, in terms of trading using structure, how important is the adr? Yea, might not reach tp quick but it's relative to the structure (example a pin bar at support) isn't it. Assuming I long at the pin bar at support, The distance to the next resistance (possible tp) might be 50 pips for a low adr pair (eg eurgbp), but for a volatile pair like gbpjpy might be 150 pips. But the adr for gbpjpy is 3 times more which eventually evens out the adr issue isn't it?
  • #9
  • Apr 3, 2014 9:53am Apr 3, 2014 9:53am
adr??
  • #10
  • Apr 3, 2014 7:02pm Apr 3, 2014 7:02pm
Average Daily Range
  • #11
  • Edited 7:50pm Apr 3, 2014 7:14pm | Edited 7:50pm
Random market, profits are your only real edge. There's a reason all other business expect to sell their products for much more than they pay for them, traders are superb at missing the startlingly obvious....
Attached Image (click to enlarge)
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tradewith60
  • #12
  • Apr 3, 2014 9:34pm Apr 3, 2014 9:34pm
Quoting 60minuteman
Random market, profits are your only real edge. There's a reason all other business expect to sell their products for much more than they pay for them, traders are superb at missing the startlingly obvious.... {image}
This data is compiled using a random entry into the market?
  • #13
  • Apr 3, 2014 10:01pm Apr 3, 2014 10:01pm
I usually like 60mm posts, but I can't decipher this one. I can't read the image.

As for your topic I think you have nailed one of the constant problems traders have. I know I have struggled with it. I'll give it more thought and post later. I look forward to seeing ehat comes up.
  • #14
  • Apr 3, 2014 10:52pm Apr 3, 2014 10:52pm
Here's my take:
I have found that your trading method/style is a major factor. By this I mean that your method has to be such that it allows a fairly tight stop. Personally, I use Fib retracements in a trend. For instance, see the attached image. Each one of the price labels represents a swing retracement, and each one profited more than 50 pips. The stop was below the next fib level (around 20 pips). The stops are small. For targets I often use Fib Expansions (as seen on the top right).
At the top and bottom of trends, I will try a harmonic pattern, again with a tight stop - but with these I will wait for confirmation. I also use an EA for break even.
Attached Image (click to enlarge)
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  • #15
  • Apr 4, 2014 12:49am Apr 4, 2014 12:49am
When you move your stop to breakeven you aren't creating any long term statistical advantage, you are just playing a psychological trick on yourself. The market doesn't take any cognizance of how you are positioned - it's next move has nothing to do with where, how or why you entered.

There are areas on a chart where it is correct to buy, and there are areas where it is correct to sell - when you move s/l to b/e you are effectively placing a BUY order and a SELL order at exactly the same level, virtually guaranteeing to make at least one mistake in every trade.

When you are in a trade, try asking yourself this question. "Given the market situation right now, if I had no position, would it be correct to open a new trade in this direction?" If the answer is "no", you should exit. The placement of your stoploss should reflect a level at which you feel it would be a mistake to enter a new trade in that direction.
si hoc legere scis nimium eruditionis habes
  • #16
  • Apr 4, 2014 3:17am Apr 4, 2014 3:17am
Quoting 60minuteman
Random market, profits are your only real edge. There's a reason all other business expect to sell their products for much more than they pay for them, traders are superb at missing the startlingly obvious.... {image}
60minuteman, not that I'm an expert on the matter, but the distribution of returns in your table doesn't look like anything random to me. More like the result of clairvoyance or voodoo magic.
  • #17
  • Apr 4, 2014 3:41am Apr 4, 2014 3:41am
Quoting gmbl
{quote} 60minuteman, not that I'm an expert on the matter, but the distribution of returns in your table doesn't look like anything random to me. More like the result of clairvoyance or voodoo magic.
sorry, I always make crap posts when I should be asleep.

What I was trying to say is that essentially the markets are random, so only methods that generate higher RR really have an edge.

You can argue that a 50%fib combined with daily SR and a pin bar will go to 2/1 70% of the time - but by saying that you are giving the market a certainty that does not exist. i.e you're relying on something that is almost impossible to remain true or constant.

If your method generates profits large enough to allow you room for error and uncertainty then that is an edge in an uncertain market - the bigger that gap the better. Generally traders obsess over all the small details that do nothing to improve their odds and in fact erode their edge.

Fact remains, a large percentage lose and a large percentage have small wins.
tradewith60
  • #18
  • Apr 4, 2014 5:02am Apr 4, 2014 5:02am
Quoting 60minuteman
What I was trying to say is that essentially the markets are random, so only methods that generate higher RR really have an edge.
Agreed... thanks for clearing that up.
  • #19
  • Apr 4, 2014 5:53am Apr 4, 2014 5:53am
gd mng Alfis,

ok on the adr, those things you mention I use as well. But I think also think its very important to look at cost per pip in dollar terms(or whatever base currency you use) as well. As of today, the USD pip for EurGbp is $16.60 vs. GbpJpy is $9.62 and really volatile pairs like UsdMxn is only 0.76 cents and UsdPln is 3.29. Pip value comes into play when I decide position size. T/N rolls are also a consideration
  • #20
  • Apr 4, 2014 6:54am Apr 4, 2014 6:54am
Quoting alfis
I understand the few keys concepts of "Keep losses low, and let profits run", and also "Take profits whenever you can, trade to make money, not prove I'm right". I've been thinking on implementing both two yet the information each portrays is contradicting. Following the latter, if I do have multiple TP points (TP1,TP2,TP3 etc), I'm basically earning a little each time I hit my TP zone, but facing a full loss when my SL gets hit, which is the opposite of the first point of keeping losses low. Anyone can share some insights into this? Or does anyone...
With MM, the 2 important numbers are:

1) % win rate and
2) Reward:Risk ratio (RRR)

If you “let profits run”, you’ll have a high RRR, but a low win rate e.g. a swing trade strategy. Conversly, if you “take profits early”, you’ll have a high win rate, but a poor RRR e.g. a scalper type strategy. Both can be profitable, if the strategy and execution are of good quality.

Given that you already have a strategy, you should be able to define the RRR and win rate. Sounds like you’re more of a swing trader, and so I assume your RRR is something like 2:1 or more. So the question is whether your win rate is high enough to make the strategy profitable. For example, if you have a 2:1 RRR, you’ll still make good money with a win rate of even 50%, but might struggle if the win rate is only 30%. Ultimately it comes down to the quality of your strategy.

If you find your profits are getting wiped out too easily with the losses, it could be that your stop size is excessive, and that you could tighten it up without having much negative impact on the win rate. Considering something like a timed or trailing stop. If your win rate is too low, yiou might need to refine your entry/exit rules.
Anyway, the important point is to just know what those 2 numbers are for your strategy, so when you make improvements, you can measure the impact the changes will make.

Personally, I don’t think there’s any point reading a book about it. 99.99% of the forex books are not written by profitable traders. Spend your time studying charts, and looking for setups that can improve your strategy.
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