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Risk Management..let's get something going here....

  • #1
  • First Post: Jul 24, 2006 8:24am Jul 24, 2006 8:24am
Alright,

I've been watching the boards for a while, and see a lot of great ideas for trading systems and optimization and all that other stuff. At the end of the day, money can be made on a ton of different systems, there is no arguement there. However, what makes
  • #2
  • Jul 24, 2006 8:29am Jul 24, 2006 8:29am
a person successful at this game is really about two words: Money Management. It doesn't matter if you bet at the track or bet on the pound, how you ride your gains and cut your losses can make a huge impact and that makes the real difference.

I wanted to get a huge discussion board going on risk management and what are your thoughts and ideas and what kind of risk management idea do you use? Is it based on price or based on how much capital is being bled out..or a combo of both? I have gone live and of course blew it all out due to overleveraging and money management techniques that..were....eh...not so good. My picks were great and they did go my way, eventually (as in 5 hours later), but by that time I was out. Looking back, I see that I put WAYYY too much on that trade.

The system worked, and still works...the money management just needs some fixing and I was looking for some ideas....

thanks for the help!

The Hun.
  • #3
  • Jul 24, 2006 8:38am Jul 24, 2006 8:38am
Hi TheHun, I hope you get lots ideas from this thread I will start things off. There are a multitude of textbook, mathematically driven money management styles out there, most of which are useful and helpful, but here is my strategy which works for me (and has been debated in another thread here at FF).

Firstly I stick with the rule of not risking more than 5% of my account in open trades, I try to keep it to 3% on my main account which has some more room to move. If this means I can open 1 full lot, I fade into a move, opening a portion at market, and then the remainder of that full lot as price moves either against or for me (most of the time there is a move against me, giving me a better net price and reducing my risk). Of course there is some common sense involved, but it is a nice way to give myself a little more room without the added risk.

In terms of taking profits, I will usually scale out of a trade, the same way I scaled in, taking a portion at a pre-defined profit area, and let the remainder run until I feel it is time to close. I do not use trailing stops on that last portion of the trade, I lock in a small profit and try to read the market for the best time to exit. This can be anything between 1 hour to 1 week depending on the move.

That is just a small idea on what I do, it is what makes me feel comfortable which is important. Best of luck!
You can quit and they won't care, but you will always know.
  • #4
  • Jul 24, 2006 8:38am Jul 24, 2006 8:38am
Hi Hun!

I'm sorry for you (and the blown account). I understand you as I have walked in your shoes (one blown account with money that I couldn't afford to loose).

I can recommend the Private Forum section of Forex Factory.com. There is a wealth of high quality information there that has totally changed my thinking. I had read before about MM, but the way Fijitrader explains this topic is just CONVINCING and literally forces you onto the right track.

I have no special interest in promoting the Private section of this forum, as it costs 129 US$ monthly (special promotion until July 31st, 2006). I'm not an affiliate or do have any connections to the owners/writers. But the information is FANTASTIC. I don't regret any minute or dollar spent on this one.

Peter.
  • #5
  • Jul 24, 2006 2:57pm Jul 24, 2006 2:57pm
I've learned from experience (and it was very painful) to never, ever overleverage yourself. You can make a lot, but can lose a lot also ... enough said.

What I do now is minimize my risk, but still enable the act. to make a lot, if done properly.

I initially set a maximum amt. that I will get into 1 trade (lets say 6% of the portfolio). I first buy the initial 2%, and set a stop. If stopped out, its a small loss.

If it goes my way, I add the 2nd 2% on a pullback, and move the stop up to breakeven (or near) for the entire 4% position. As the price moves up, I will run a trailing stop, and add the 3rd 2% on another pullback, and trail the stop, or exit when my target(s) are hit.

I think perpahs this can be optimized, entering 3%, 2%, 1%, or vice versa ... depends on avg gain, avg loss, % win, % loss, etc ... more study needed here I guess.

Hope this helps.

EZ
  • #6
  • Jul 24, 2006 3:03pm Jul 24, 2006 3:03pm
Quoting ezcurrency
I've learned from experience (and it was very painful) to never, ever overleverage yourself. You can make a lot, but can lose a lot also ... enough said.

What I do now is minimize my risk, but still enable the act. to make a lot, if done properly.

I initially set a maximum amt. that I will get into 1 trade (lets say 6% of the portfolio). I first buy the initial 2%, and set a stop. If stopped out, its a small loss.

If it goes my way, I add the 2nd 2% on a pullback, and move the stop up to breakeven (or near) for the entire 4% position. As the price moves up, I will run a trailing stop, and add the 3rd 2% on another pullback, and trail the stop, or exit when my target(s) are hit.

I think perpahs this can be optimized, entering 3%, 2%, 1%, or vice versa ... depends on avg gain, avg loss, % win, % loss, etc ... more study needed here I guess.

Hope this helps.

EZ
that is REALLY weird, because I was thinking about that 15 minutes ago about how to scale into trades and find some success there, that basically you get in small, then once you establish its a winner, then you just pile in....still need to do some more math I guess...

yeah, and overleveraging....ehhhhhh kinda really bad...but I learned my lesson, and I'm glad I learned it now, and not when the account really gets up there....I'd rather keep my trading tuition costs small...

thanks for your input!

The Hun.
  • #7
  • Jul 24, 2006 4:33pm Jul 24, 2006 4:33pm
Heres what I use please feel free to give your opinions.

Risk of equity-2% or less but no more than 50 pips
Leverage-10:1 or less
Risk reward-1:3 (reward is three times greater than my risk)

I exit partial positions or use a TS on fib levels and/or exit my entire position when I see a reversal patern. I trade on a daily candle chart.

Forexjedi
Stacking pips since 2002
  • #8
  • Jul 24, 2006 4:43pm Jul 24, 2006 4:43pm
Quoting forexjedi
Heres what I use please feel free to give your opinions.

Risk of equity-2% or less but no more than 50 pips
Leverage-10:1 or less
Risk reward-1:3 (reward is three times greater than my risk)

I exit partial positions or use a TS on fib levels and/or exit my entire position when I see a reversal patern. I trade on a daily candle chart.

Forexjedi
I agree with all of your parameters ... the only thing I would add is a method to add to your position on pullbacks, and use a trailing stop to take you out, or scale out at appropriate technical levels.

The BIG $ is made by holding a core position for weeks, and adding to it on pullbacks and perhaps taking some off at rallies, while holding the core with a trailing stop ...

EZ
  • #9
  • Jul 25, 2006 4:53am Jul 25, 2006 4:53am
Depends on your MM goals.

Do you want to "maximize profit"?? if so, that's easy, Kelly Formula.

Do you want to mitigate risk? That's easy, buy a 30-year T-Bill and forget about it.

Or do you want to do something inbetween? Then that's difficult..
google:
  • #10
  • Jul 25, 2006 7:54am Jul 25, 2006 7:54am
Money management does make a difference, that is very true. However, too many times I read books, articles and opinions stating that the difference maker is the money management etc but failing to stress the importance of a reliable system that does give you an edge.

If your system doesn't give you an edge, then money management will be as useful as if you applied it to a coin-toss system. It'll basically keep you alive but money management alone won't get you the big profits we all are aiming at.

If you do have an edge, then proper money management will only maximize that edge.

Before anyone can advise you on money management, you should tell us a little more about your strategy, such as:

- timeframe

- avg stop

- avg winner

- winning%

- trades frequency
  • #11
  • Jul 25, 2006 7:58am Jul 25, 2006 7:58am
Quoting twoblink
Depends on your MM goals.

Do you want to "maximize profit"?? if so, that's easy, Kelly Formula.

Do you want to mitigate risk? That's easy, buy a 30-year T-Bill and forget about it.

Or do you want to do something inbetween? Then that's difficult..
T Bill??? Yeah, so I can double my money every 75 years...sure!!! What is the Kelly formula? Is that the one where you keep doubling down after each loss...or is that Martingale...I'm not sure which one is which but I know I've heard of that...


The Hun.
  • #12
  • Jul 25, 2006 8:12am Jul 25, 2006 8:12am
Quoting ItalianSharp
Money management does make a difference, that is very true. However, too many times I read books, articles and opinions stating that the difference maker is the money management etc but failing to stress the importance of a reliable system that does give you an edge.

If your system doesn't give you an edge, then money management will be as useful as if you applied it to a coin-toss system. It'll basically keep you alive but money management alone won't get you the big profits we all are aiming at.

If you do have an edge, then proper money management will only maximize that edge.

Before anyone can advise you on money management, you should tell us a little more about your strategy, such as:

- timeframe

- avg stop

- avg winner

- winning%

- trades frequency
Essentially my strategy is based on chart reading...i'm old school...mostly candlestick patterns, but I'll get into double tops and flags, pennants and all that good stuff....my winning percent is about 65%, when I win, I average about 84 pips, but when I lose...this is where trouble hits...the stops I use are at 25 pips and as for time frame and frequency, well that is all over the place because I'll simply scour the charts and timeframes for the pattern that will give me the best sense of direction of where that pair is moving.

Reading this now, I realize that I should have a more formalized strategy in place. I've traded like this with stocks and have done quite well, but FX, as I'm learning, is a whole new game. But what is getting to me is the leverage. At 400:1, it's amazing, but it makes things really wonky when it comes to money management and that is what I am trying to balance out. Essentially it is like this, my sense of direction is usually right, way better than 65%. The problem is, is that by nature I'm an aggressive trader. If I sense a direction, I get in the muck real fast. Most (80-85%) of the time, I'm right, the problem is that sometimes I jump the gun way to fast and get in a little TOO early and that is where problems start and that is how I blew out my account. I put on a nice size and it just wiped me out...only to be right a little later in the day with a 145 pip move up. If my position was smaller or sized just right, it could have held long enough to catch that move, and that is why I'm here trying to figure out how best to position myself so that next time I'll make that cashola.

Just like in Rounders "You don't hear much about guys who take their shot and miss, but I'll tell you what happens to 'em. They end up humping crappy jobs on graveyard shifts, trying to figure out how they came up short."

That's what I'm trying to figure out...

The Hun.
  • #13
  • Jul 25, 2006 8:20am Jul 25, 2006 8:20am
Quoting thehun
Essentially my strategy is based on chart reading...i'm old school...mostly candlestick patterns, but I'll get into double tops and flags, pennants and all that good stuff....my winning percent is about 65%, when I win, I average about 84 pips, but when I lose...this is where trouble hits...the stops I use are at 25 pips and as for time frame and frequency, well that is all over the place because I'll simply scour the charts and timeframes for the pattern that will give me the best sense of direction of where that pair is moving.

Reading this now, I realize that I should have a more formalized strategy in place. I've traded like this with stocks and have done quite well, but FX, as I'm learning, is a whole new game. But what is getting to me is the leverage. At 400:1, it's amazing, but it makes things really wonky when it comes to money management and that is what I am trying to balance out. Essentially it is like this, my sense of direction is usually right, way better than 65%. The problem is, is that by nature I'm an aggressive trader. If I sense a direction, I get in the muck real fast. Most (80-85%) of the time, I'm right, the problem is that sometimes I jump the gun way to fast and get in a little TOO early and that is where problems start and that is how I blew out my account. I put on a nice size and it just wiped me out...only to be right a little later in the day with a 145 pip move up. If my position was smaller or sized just right, it could have held long enough to catch that move, and that is why I'm here trying to figure out how best to position myself so that next time I'll make that cashola.

Just like in Rounders "You don't hear much about guys who take their shot and miss, but I'll tell you what happens to 'em. They end up humping crappy jobs on graveyard shifts, trying to figure out how they came up short."

That's what I'm trying to figure out...

The Hun.
It sounds you have a decent system right there, whats all your stress about?

I also operate out of different charts simply because there are things that I want to see somewhere and I need to look around to find them.

When I asked you about your timeframe, I wanted to know what type of trader you are. Are you a daytrader, swing trader, scalper?

Your avg winner is 84 pips and avg loser is 25 pips. You win 65% of the times, what the hell is your problem man? You should be a money-making machine!

Can you please clearly state what you think your major problem is?
  • #14
  • Jul 25, 2006 8:58am Jul 25, 2006 8:58am
Quoting ItalianSharp
It sounds you have a decent system right there, whats all your stress about?

I also operate out of different charts simply because there are things that I want to see somewhere and I need to look around to find them.

When I asked you about your timeframe, I wanted to know what type of trader you are. Are you a daytrader, swing trader, scalper?

Your avg winner is 84 pips and avg loser is 25 pips. You win 65% of the times, what the hell is your problem man? You should be a money-making machine!

Can you please clearly state what you think your major problem is?

In a nutshell, sticking to the plan....yes I make 84 pips..but when I lose...I keep losing in one position....so, I'll put on a trade....lose 25....stop out...but it looks sweet..then I'll go on it again....and DOUBLE my position and lose a little more...while I lose 25 pips...the problem is that I'm increasing my LOT size and that is where problems have sunk me. It's my position sizing. Because yes, 65% right, 84 to 25 pips, I should own my own island by now...I think i'll call it...AUSTRALIA....but the issue is with Lot sizes...i get carried away and aggressive with my trading and it's the way i'm increasing the lot sizes that is unfortunately magnifying my losses and then that outapaces any gains i have..

so the real question really relates to position sizing....which is really about risk management....
  • #15
  • Jul 25, 2006 9:13am Jul 25, 2006 9:13am
Quote
T Bill??? Yeah, so I can double my money every 75 years...sure!!! What is the Kelly formula? Is that the one where you keep doubling down after each loss...or is that Martingale...I'm not sure which one is which but I know I've heard of that...

Martingale is when you double down after you lose. We call that "Averaging down". Only Losers Average Losers. You will die a horrible death when you keep doing that.


<q></q>
Quote
<q>If a gambler places bets on the input symbol to a communication channel and bets his money in the same proportion each time a particular symbol is received, his capital will grow (or shrink) exponentially. If the odds are consistent with the probabilities of occurrence of the transmitted symbols (i.e., equal to their reciprocals), the maximum value of this exponential rate of growth will be equal to the rate of transmission of information. If the odds are not fair, i.e., not consistent with the transmitted symbol probabilities but consistent with some other set of probabilities, the maximum exponential rate of growth will be larger than it would have been with no channel by an amount equal to the rate of transmission of information.</q>
<cite>Kelly, J. L., Jr., A New Interpretation of Information Rate, Bell System Technical Journal, pp.917-926, July, 1956.</cite>




Quote
Kelly Formula

<q>What is the Kelly criterion (or formula)? It is a formula for calculating how much to bet. It assumes that your objective is long term capital growth (getting rich). The handicapper's choice of money management strategy is similar to the stock market choice between growth stocks and income stocks. Growth stocks tend to be more volatile, but in the long term return more profit. That is because the profits from growth stocks are reinvested rather than skimmed off. Every reinvestment is a calculated risk. Therefore, income stocks tend to fluctuate in value less, but also return less profit in the long term. Kelly betting is for growth. It reinvests profits, and thus puts them at risk. If your objective is to make small but consistent profits,it may be too aggressive a money management scheme.</q>
<cite>Web Post</cite>

The Kelly's formula is : Kelly % = W - (1-W)/R where:

 

  1. Kelly % = percentage of capital to be put into a single trade.
  2. W = Historical winning percentage of a trading system.
  3. R = Historical Average Win/Loss ratio.


Note though, that betting Kelly has a high probability of 1 of two things:

Bankruptcy, or maximized profit. And let me just say, for the record, I can't stress that part enough. BANKRUPTCY. You can't win at the game if you aren't in the game, and you can't be in the game if you don't have money.
google:
  • #16
  • Jul 25, 2006 9:40am Jul 25, 2006 9:40am
Quoting twoblink
...and you can't be in the game if you don't have money.
Exactly! That's what I've been trying to come up with, a plan with a "do not destruct" button attached to it....my last few plans unfortunately had self destruct written all over it...I think the key really is patience. Everyone, myself included came to this game because you could put a little down and seem to be able to run it up to huge amounts. I know everyone has done that calculation that oohhh if I make 70 pips a day EVERYDAY for the next year, and multiply the lots..well then I'll be worth 70Billion dollars by December, myself included. It is that kind of thinking that leads to overaggression in trading and not listening to the markets and forcing expectations and so on and so forth. I've done that, learned my lesson in a hard way, starting from 0 now, but coming back! Right now, I'm at a place where I want consistency. 50 Pips a week is just fine by me...that's just 10 pips a day. Multiply that by multiple lots (not too many) and you have 2500 pips a year. 3 lots per trade and that is 75K per year, not too shabby!

In a nutshell, that is my plan...now how do I get there???

The Hun.
  • #17
  • Jul 25, 2006 10:02am Jul 25, 2006 10:02am
Quoting thehun
Essentially my strategy is based on chart reading...i'm old school...mostly candlestick patterns, but I'll get into double tops and flags, pennants and all that good stuff....my winning percent is about 65%, when I win, I average about 84 pips, but when I lose...this is where trouble hits...the stops I use are at 25 pips and as for time frame and frequency, well that is all over the place because I'll simply scour the charts and timeframes for the pattern that will give me the best sense of direction of where that pair is moving.

Reading this now, I realize that I should have a more formalized strategy in place. I've traded like this with stocks and have done quite well, but FX, as I'm learning, is a whole new game. But what is getting to me is the leverage. At 400:1, it's amazing, but it makes things really wonky when it comes to money management and that is what I am trying to balance out. Essentially it is like this, my sense of direction is usually right, way better than 65%. The problem is, is that by nature I'm an aggressive trader. If I sense a direction, I get in the muck real fast. Most (80-85%) of the time, I'm right, the problem is that sometimes I jump the gun way to fast and get in a little TOO early and that is where problems start and that is how I blew out my account. I put on a nice size and it just wiped me out...only to be right a little later in the day with a 145 pip move up. If my position was smaller or sized just right, it could have held long enough to catch that move, and that is why I'm here trying to figure out how best to position myself so that next time I'll make that cashola.

Just like in Rounders "You don't hear much about guys who take their shot and miss, but I'll tell you what happens to 'em. They end up humping crappy jobs on graveyard shifts, trying to figure out how they came up short."

That's what I'm trying to figure out...

The Hun.
From what I understand, your problem is risking different amounts of capital per each trade.

You dont treat your trades the same. Some you risk 5%, some other 2.5%. That's how you screw it all up in my opinion.

You dont need a much elaborated risk management but rather DISCIPLINE.

You need to learn how to treat each trade the same. No matter how sure you feel about one particular trade, you must understand that each trade is unique and is not correlated to what happened in the past.

Here is what I suggest you do:

1. Set a % of capital you are willing to risk per each trade.

2. Treat all trades the same.

3. Take your losses and move on to the next setup. Don't get personally involved with a particular trade.

4. When you have say 2 consecutive losses or 2 consecutive wins, call it a day. It might help you avoid overtrading and overleveraging yourself. This simple rule might help you acquire more discipline.
  • #18
  • Jul 25, 2006 11:06am Jul 25, 2006 11:06am
Quoting ItalianSharp
From what I understand, your problem is risking different amounts of capital per each trade.

You dont treat your trades the same. Some you risk 5%, some other 2.5%. That's how you screw it all up in my opinion.

You dont need a much elaborated risk management but rather DISCIPLINE.

You need to learn how to treat each trade the same. No matter how sure you feel about one particular trade, you must understand that each trade is unique and is not correlated to what happened in the past.

Here is what I suggest you do:

1. Set a % of capital you are willing to risk per each trade.

2. Treat all trades the same.

3. Take your losses and move on to the next setup. Don't get personally involved with a particular trade.

4. When you have say 2 consecutive losses or 2 consecutive wins, call it a day. It might help you avoid overtrading and overleveraging yourself. This simple rule might help you acquire more discipline.

I am totally sizing my trades wrong and that description is exactly how I blew the account up because I just added more and more and was just pinned to that trade (it did go the way I wanted it to, but not until all my money was gone). I'll definitely be implementing those ideas...especially about keeping each trade "independant". Conciously and cognitively I know I'm supposed to do that, but in practice it's a different story.

My next question is that of capitalization. I really think I'm undercapitalized. What is a good cap amount if you trade 400:1 leverage, but with the possibility of using 10K mini lots?

This is exactly the kind of feedback I was looking for..thanks!

The Hun.
  • #19
  • Jul 25, 2006 12:21pm Jul 25, 2006 12:21pm
Quoting thehun
I am totally sizing my trades wrong and that description is exactly how I blew the account up because I just added more and more and was just pinned to that trade (it did go the way I wanted it to, but not until all my money was gone). I'll definitely be implementing those ideas...especially about keeping each trade "independant". Conciously and cognitively I know I'm supposed to do that, but in practice it's a different story.

My next question is that of capitalization. I really think I'm undercapitalized. What is a good cap amount if you trade 400:1 leverage, but with the possibility of using 10K mini lots?

This is exactly the kind of feedback I was looking for..thanks!

The Hun.
If you trade 10K mini-lots with a 400:1 leverage, that means you are only required to put down $25 for each mini-lot contract you open.

I trade mini-lots myself yet I never use a leverage higher than 1:4. I know it may sound ridiculous, but that's how you survive in the long run.

I also like to open multiple lots to scale out of my positions and reduce risk exposure as soon as possible.

I suggest you have enough capital to at least afford 2 contracts per trade. If your average loser is 25 pips, a full stop would be a $50 loss to your equity.

You can easily do the calculations now:

- if your equity is $10,000, a full-stop loss would correspond to 0.50% of your capital

- if your equity is $5,000, a full-stop loss would correspond to 1% of your capital

- if your equity is $2,500, a full-stop loss would correspond to 2% of your capital

- if your equity is $1,250, a full-stop loss would correspond to 4% of your capital

I wouldn't go lower than that as I consider anything above 2% per trade is way too much for stability and risk management.

If you have a little more than a dime to spare for trading, I would give it a shot and would try to learn how to discipline yourself before you pour more money into it.

I believe you have more a discipline problem than a money management problem.

Hope it helps. GL
  • #20
  • Jul 25, 2006 1:25pm Jul 25, 2006 1:25pm
When I think about risk management, I don't even bother with asking about leverage. To me, leverage is a no-brainer. I see it as my broker saying "Here is an interest free loan." OK its not exactly a loan but for the way I use it, it is. With high leverage you can keep a portion of your capital in another account and still have as much trading power as you need.

As for determining risk %, that is an individual preference I believe. When I see a trade that I want to make, I use a simple excel worksheet I created to determine how many lots I will enter. I plug the numbers in for each trade and it tells me how many lots to enter.
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