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Money management - What is the secret?

  • #1
  • First Post: Dec 5, 2014 9:59am Dec 5, 2014 9:59am
Hello all traders,
For a long time people told me that money management is fondamental , i agree , but often is very difficult discover and understand the reason.
Is it possible to convert a losing strategy into a winning strategy thanks to the money management?
I want to try to give an example:
10 trade = 4 winner 6 loser, with R:R 1: 1 ...
This is a losing strategy as you can see!
Some maths :
Assuming that every trade cost us 10 euro and the total money to risk is 100 euro we will have 80 euro( 4 winning trade * 10) and -60(losing trade)
What happen if i change the money to risk for each position?
1 trade (LOSE) stake =9.9 euro
2 trade (WIN) stake =13.2 total =103.3
3 trade(Lose ) stake = 9.9
4 trade (Win) stake = 14.15 total = 107.54
5 trade(win) stake = 9.43
6 trade(Lose ) stake =3.77
7 trade(WIN) stake =7.54 totale =120 euro .... 20 % ROI with 4 winner trades and 6 loser trades while in the classical money management we'll lose.
8 trade
9 trade
10 trade

http://gyazo.com/6ca34e879c647f747f3693d67dcd3625

This is not Martingale !

OK, now i want to say sorry because i know my english is very very bad and it will be not easy for you understand what i wanna say...
WE JUST NEED TO KNOW WHAT IS OUR r:r AND % OF WINNING TRADES AND WE CAN kNOw BEFORE WHAT WILL BE OUR ROI.
We just care that 4 trades /10 will be winner.
Some condition:
Every trade must to be consecutives, we need to know if every trade lose or win before to calculate the next lot size, i used this strategy in the betting world and it's work, in the forex you have to add spread, commission, and the margin.
Until now i talked using the word "money to risk", before to apply the strategy you will need some money extra only for the margin, so if the money to risk is 100 euro, you will need at least other 200 euro for the margin but not to risk.

If there are enough people interested to this,in the next step will be explained how to calculate every stake.

Another examples
Money to risk =100
trades =30
winning trade: 3
R:R 1 : 6
ROI = 1.34
usually a risk 5 pips to earn 30 pips...and with only 3 trades i earn 34%.
  • #2
  • Dec 5, 2014 10:26am Dec 5, 2014 10:26am
ANOTHER EXAMPLE :
STRATEGY 1 : 3(R:R)
MONEY TO RISK : 1000
WINNING TRADE : ONLY 20% , SO WE THINK TO WIN 10 TRADES ON 50 .
if we use a 50 euro stop loss and 150 euro target profit, only as example we will have
50 *40(losing trades)= -2000
150 * 10(winning trades) = 1500
total =-500
all this with the CLASSIC MONEY MANAGEMENT!
My money management :
same conditions but we will earn 19 %, if you cut spread and commission we will earn only a few money but this is not what i want
to make you understand.
http://gyazo.com/6b7a2f89f4ca09b3f761ab557e3d359f
  • #3
  • Dec 5, 2014 10:32am Dec 5, 2014 10:32am
Tell me please your losing strategy , R:R,% winning trade and losing trade...
i want try to set a winning money management!
  • #4
  • Dec 5, 2014 8:28pm Dec 5, 2014 8:28pm
I don't know what you're going on about above but...

Risk management is simple.

Restrict your losses and make the most of your winning trades.

Don't try to think of it in terms of X:X , each trade is different.

Make a rule and stick to it, for example, I use 1% of cumulative equity risk per trade. You need to normalize your risk profile each trade so you are consistent.
  • #5
  • Edited 9:19pm Dec 5, 2014 9:06pm | Edited 9:19pm
Quoting Cb92
I don't know what you're going on about above but... Risk management is simple. Restrict your losses and make the most of your winning trades. Don't try to think of it in terms of X:X , each trade is different. Make a rule and stick to it, for example, I use 1% of cumulative equity risk per trade. You need to normalize your risk profile each trade so you are consistent.


Quoting Gurudeva
Tell me please your losing strategy , R:R,% winning trade and losing trade... i want try to set a winning money management!
Cb92 is spot on IMHO. Look to hold your trades for longer if the pair is trending strongly, and the underlying reasons for the trend remain in place. There is no strict mathematical formula (e.g. R:R ratio, trailing stop distance) to trade management that will work optimally all the time, because every situation is different.

Similarly, there is no money management formula that, in itself, can provide an edge (mathematical proof here). The best you can do is to keep your position sizes small (don't overleverage yourself) and consistent (because you don't want one loss wiping out the $$$ gained by several wins) to protect your capital, like Cb92 says.
  • #6
  • Dec 6, 2014 1:48am Dec 6, 2014 1:48am
Hi Gurudeva,

I think you understand the important of money management, trade management and risk management for successful forex trading in long term. You can read two thread below, there are quite good for money management, trade management and risk management. One thread with only 7% wining rate but he can earn a ot of money.

http://www.forexfactory.com/showthread.php?t=514127

http://www.forexfactory.com/showthread.php?t=472903
  • #7
  • Dec 6, 2014 6:40am Dec 6, 2014 6:40am
Quoting Cb92
I don't know what you're going on about above but... Risk management is simple. Restrict your losses and make the most of your winning trades. Don't try to think of it in terms of X:X , each trade is different. Make a rule and stick to it, for example, I use 1% of cumulative equity risk per trade. You need to normalize your risk profile each trade so you are consistent.
Quote
Cb92 is spot on IMHO. Look to hold your trades for longer if the pair is trending strongly, and the underlying reasons for the trend remain in place. There is no strict mathematical formula (e.g. R:R ratio, trailing stop distance) to trade management that will work optimally all the time, because every situation is different.

Similarly, there is no money management formula that, in itself, can provide an edge (mathematical proof here)....


Thanks you for your answer
I'm assuming that trading is very very similar to the betting.
And i'm trying to use a betting money management .
I know there are know mathematical formula who make you winner forever.
But what i wanna say is that the classic money management , the simple (as Cb92 says) is not the best way to manage a trading system.
Actually i know that a trailing stop and so a unknow R:R can bring huge profits, but this time i want to consider a fixed stop loss and profit target, so the only think i wanted to say till now in my previous post is that , assuming an X:X R:R , with X total operation, and assuming that we think to win a X trades with while with the normal money management can make us lose with another money management can give us profits.

I want to try to give an example:
10 trade = 4 winner 6 loser, with R:R 1: 1 ...
This is a losing strategy as you can see!
Some maths :
Assuming that every trade cost us 10 euro and the total money to risk is 100 euro we will have 80 euro( 4 winning trade * 10) and -60(losing trade)
What happen if i change the money to risk for each position?
1 trade (LOSE) stake =9.9 euro
2 trade (WIN) stake =13.2 total =103.3
3 trade(Lose ) stake = 9.9
4 trade (Win) stake = 14.15 total = 107.54
5 trade(win) stake = 9.43
6 trade(Lose ) stake =3.77
7 trade(WIN) stake =7.54 totale =120 euro .... 20 % ROI with 4 winner trades and 6 loser trades while in the classical money management we'll lose.
8 trade
9 trade
10 trade


okok...but what i did??
Just used a mathematical algoritm to optimize my money management.
Look the picture:
http://gyazo.com/e9e689bfea0a4154200db065eeea299f

It is in italian, i will try to translate.
It ask me "cassa"(money to risk) , then "event " ( trades) and then "attesi" ( what you think will be winner trades) , "quote iniziali uguali" is the rendiment i put 2 assuming to a 1:1.
Normally this condition will make you lost!!!
With this money management it five you 85% return(Resa totale)
What wrong in this ? I know is not easy to forecast the rendiment of a trading system, but this will be our risk, using back test or something like that we can knowwhat is our %.
This algorithm Tell you the stake for each trades, after the first it wanna know if the first was winner or loser and then give you the stake for the second trade.
It doesn't care when this 50 winner trader happens(for the example in the picture) it just tell you that if you make 50 winner on 100 trade with R:R 1:1 it give you 85 % return, while normally it will be a loser strategy !
I hope it will be clear, but the way if you didn't understand somethng please tell me...
  • #8
  • Dec 6, 2014 8:16am Dec 6, 2014 8:16am
I also want to say... this is not the holy gral !
If you have a strong loser strategy it doesn't work.
It's only the chance to improve the ROI.
In the trading we always look for the best, is the classic money management the best?
In the time i discovered that there are money management strategy who can give you more, this is one of them.
  • #9
  • Dec 6, 2014 8:27am Dec 6, 2014 8:27am
I don't think it would be possible to make your losing strategy a winner even if you used prooper money management, because your risk to reward is neutral,
but if you change your risk to reward as well, you should be able to do it, you should have atleast 2:1 but depending on how much of a looser your strategy is, then possibly more than 2:1 is needed, you need to calculate that based on your win ratio.
Bulls are stupid Animals!especially when Im short!
  • #10
  • Dec 6, 2014 8:30am Dec 6, 2014 8:30am
Quoting roughtrader
I don't think it would be possible to make your losing strategy a winner because your risk to reward is neutral, but if you change your risk to reward as well, it could be done
Yes , of course not all the losing strategy can be winner!
But as i said in the example in 1 post , you can improve more and more the results of a strategy.
I made an example of how a losing strategy can become a winner strategy, but it is not for all the losing strategy .
  • #11
  • Dec 6, 2014 8:35am Dec 6, 2014 8:35am
Quoting Gurudeva
{quote} Yes , of course not all the losing strategy can be winner! But as i said in the example in 1 post , you can improve more and more the results of a strategy. I made an example of how a losing strategy can become a winner strategy, but it is not for all the losing strategy .
yes I agree, it is the risk to reward that is the key here, if you flip a coin 1000 times you would, even if you used mm come up brakeven with a 50% win ratio,
I assume your strategy doesn't have a 50% win ratio, so you need more than 1 to 1, thats pretty simple, if you want to find out how much you need, then it isn't so hard to find out assuming you have backtested your system and know your win ratio.
Bulls are stupid Animals!especially when Im short!
  • #12
  • Edited 9:14am Dec 6, 2014 8:46am | Edited 9:14am
Example of a strategy.
money to risk :1000 euro
R:R 1:3
total trade 30
total winning trades : 7
Each trade will cost us 50 euro.
so we will lost in total 50 * 23(losing trades)
and we will earn in total 150 * 6(winning trades)
the total results will be - 1150(from losing trades) and +900(from winner trades) TOTAL = - 250
THIS STRATEGY WILL LOSE !

TRYING WITH ANOTHER money management!
Same conditions :
money to risk :1000 euro
R:R 1:3
total trade 30
total winning trades : 7
Each trade will cost us 50 euro.
Look the picture:
with the algorithmic money management with 7 profit trades on 30 we will have 53% return in profit.
http://gyazo.com/1dbf9c9fe70de6bc03859e4385c7017e
is this not wonderful?!?!?
http://gyazo.com/96a1af1c2e315e818c0e9128776d5a2e
I just need to make consecutive trade and set if it was winner(vinta) or loser(persa), then the algorithm calculate for me the right size for the next trade.
At the end we dont care when this 7 trades happens, but just that it happen.
If we dont have 7 winning trades, but less , we will lose all our money to risk.
  • #13
  • Dec 6, 2014 8:49am Dec 6, 2014 8:49am
Quoting roughtrader
{quote} yes I agree, it is the risk to reward that is the key here, if you flip a coin 1000 times you would, even if you used mm come up brakeven with a 50% win ratio, I assume your strategy doesn't have a 50% win ratio, so you need more than 1 to 1, thats pretty simple, if you want to find out how much you need, then it isn't so hard to find out assuming you have backtested your system and know your win ratio.
Exactly man!
  • #14
  • Dec 6, 2014 9:39am Dec 6, 2014 9:39am
Quoting Gurudeva
{quote} Exactly man!
you can definitely improve, but 30 trades is not enough to find out your win ratio because it is fluctuating a lot and it is not meaningful, when you start to come close to 1000 trades, not until then will it begin to even out and stay around it's true value (winratio) ofcourse that is a lot of trades, it would be hard to make them manually and that would take a long time, thats why you need to make an EA of your strategy and back test it.
Bulls are stupid Animals!especially when Im short!
  • #15
  • Dec 6, 2014 10:05am Dec 6, 2014 10:05am
Quoting Gurudeva
Hello all traders, For a long time people told me that money management is fondamental , i agree , but often is very difficult discover and understand the reason. Is it possible to convert a losing strategy into a winning strategy thanks to the money management? I want to try to give an example: 10 trade = 4 winner 6 loser, with R:R 1: 1 ... This is a losing strategy as you can see! Some maths : Assuming that every trade cost us 10 euro and the total money to risk is 100 euro we will have 80 euro( 4 winning trade * 10) and -60(losing trade) What...
You have discovered hot water!

And hot water is not a soup...

Modern fighters don't think like that. The trick is not to risk 5pips to get 30 but vice versa...the only thing you suggested correctly is small account - 100eur and ok risk of 10% which should be higher, at least 25%/trade.
  • #16
  • Dec 6, 2014 11:47am Dec 6, 2014 11:47am
Quoting Vitez
{quote} You have discovered hot water! And hot water is not a soup... Modern fighters don't think like that. The trick is not to risk 5pips to get 30 but vice versa...the only thing you suggested correctly is small account - 100eur and ok risk of 10% which should be higher, at least 25%/trade.
Sorry man you didn't understand what i wanted to say...
  • #17
  • Dec 6, 2014 11:50am Dec 6, 2014 11:50am
Quoting roughtrader
{quote} you can definitely improve, but 30 trades is not enough to find out your win ratio because it is fluctuating a lot and it is not meaningful, when you start to come close to 1000 trades, not until then will it begin to even out and stay around it's true value (winratio) ofcourse that is a lot of trades, it would be hard to make them manually and that would take a long time, thats why you need to make an EA of your strategy and back test it.
Yes Roughtrader, 30 trades is not enough, but you just have to add this money management to your strategy.In all the case it improve your return on the capital.
This is not trading system, just a money management strategy, do you have your own strategy? Well , adding this money management you will have the same money to risk but the possibility to have more profits.
  • #18
  • Dec 6, 2014 2:21pm Dec 6, 2014 2:21pm
You don't give the algorithm to know the next bet. I may be wrong but from the examples you give it seems to me that you expect some sort of mean reversion of your win/loss sequence. When you win "too often" according to your stats you bet less. When you get too many losers you bet more expecting the win/rate to return to its mean. That's called gambler's fallacy.
No greed. No fear. Just maths.
  • #19
  • Dec 6, 2014 3:15pm Dec 6, 2014 3:15pm
Quoting PipMeUp
You don't give the algorithm to know the next bet. I may be wrong but from the examples you give it seems to me that you expect some sort of mean reversion of your win/loss sequence. When you win "too often" according to your stats you bet less. When you get too many losers you bet more expecting the win/rate to return to its mean. That's called gambler's fallacy.
Hi PipMeUp thanks you for your answer...
You're right , this system come from the betting world...by the way in the end this system can bring to optimize and improve the profits.
  • #20
  • Dec 6, 2014 3:20pm Dec 6, 2014 3:20pm
Quoting PipMeUp
You don't give the algorithm to know the next bet. I may be wrong but from the examples you give it seems to me that you expect some sort of mean reversion of your win/loss sequence. When you win "too often" according to your stats you bet less. When you get too many losers you bet more expecting the win/rate to return to its mean. That's called gambler's fallacy.
As result of this strategy you have the same drawdrown , but the profits are bigger comparate to the normal money management.
The algorithm give me the lot size only after it know what's happened with the previous...But it depends as well by the total trades and by the money to risk.
It's not difficult, you just need to put the input and then it give you the ROI, but you have to follow the winning ratio
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