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Money Mangement, Do you take it serious?

  • #21
  • Aug 28, 2006 1:48pm Aug 28, 2006 1:48pm
Quoting philmcgrew
If you think money management doesn't matter you won't be around for very long. Money management takes the fun out of trading and makes it a business. If you're not interested in money management then simply admit that you are trading for entertainment purposes. I suppose there is nothing wrong with that until you start telling people who are interested in learning that it doesn't matter.

Phil
There is a silver lining to these traders who think MM doesn't matter.....we need someone to pay for our winners.
Secret Identity: Bill Sullivan
  • #22
  • Aug 28, 2006 1:51pm Aug 28, 2006 1:51pm
Quoting philmcgrew
Ralph Vince (a very famous money manager) did an experiemnt with 40 Ph.D.s. He ruled out doctorates with a background in statistics or trading. All others were qualified. The 40 doctorates were given a computer game to trade. They started with $10,000 and were given 100 trials in a game in which they would win 60% of the time. When they won, they won the amount of money they risked in that trial. When they lost, they lost the amount of money they risked for that trial.

When the results were tabulated at the end of the trials only 2 of the 40 had made money.

If you think money management doesn't matter you won't be around for very long. Money management takes the fun out of trading and makes it a business. If you're not interested in money management then simply admit that you are trading for entertainment purposes. I suppose there is nothing wrong with that until you start telling people who are interested in learning that it doesn't matter.

Phil

I will take the test...And i have been trading for 4 years and for the same reason everyone has been trading to make money. I started out as everyone else learning all this things untill i have discovered my own roots that work for me better. I am not trying to change the wheel or to reinvent it, i just go with what works for me and nothing wrong with other people looking for other opitions that work better for them also.
There are those who know, and there are those who don't know.
  • #23
  • Aug 28, 2006 1:55pm Aug 28, 2006 1:55pm
Quoting Captain Piptastic
There is a silver lining to these traders who think MM doesn't matter.....we need someone to pay for our winners.
I am not one of them Captain If you feel that this is working for you and makeing you money i salute you but, Its all in the displine for me. And its been working for me its gona continue working for me. I trade now i trade without emotions with clear mind and it works good!! and if you need more proof i can give you my trading log which shows 8,000$ in 1 month!!
There are those who know, and there are those who don't know.
  • #24
  • Aug 28, 2006 1:56pm Aug 28, 2006 1:56pm
I think the wash out rate of beginning forex traders answers the question of just how important money management is, If they understood risk they would not trade the way they are trading. Trading is a game of money management. Good trading!
  • #25
  • Aug 28, 2006 2:00pm Aug 28, 2006 2:00pm
Quoting palabara
I am not one of them Captain If you feel that this is working for you and makeing you money i salute you but, Its all in the displine for me. And its been working for me its gona continue working for me. I trade now i trade without emotions with clear mind and it works good!! and if you need more proof i can give you my trading log which shows 8,000$ in 1 month!!
I couldn't care less what your trading log is. Especially for 1 month. Like I said before, if you are interested in the long haul, reconsider. Math disagrees with your current assement of risk management.
Secret Identity: Bill Sullivan
  • #26
  • Aug 28, 2006 2:29pm Aug 28, 2006 2:29pm
Quoting Captain Piptastic
I couldn't care less what your trading log is. Especially for 1 month. Like I said before, if you are interested in the long haul, reconsider. Math disagrees with your current assement of risk management.
My money management is trade small enough to have more opportunity to trade again the next day. There is nothing wrong with that. I don't have time to figure what 1% risk is and then figure out how much can I bid to be able to take 40pip loss. Figuring all that out is not going to help me win without winning strategy.
  • #27
  • Aug 28, 2006 2:33pm Aug 28, 2006 2:33pm
Quoting nitman
My money management is trade small enough to have more opportunity to trade again the next day. There is nothing wrong with that. I don't have time to figure what 1% risk is and then figure out how much can I bid to be able to take 40pip loss. Figuring all that out is not going to help me win without winning strategy.
Do you consider your trading a business or a hobby? Is it merely for entertainment? or making a profit?
Secret Identity: Bill Sullivan
  • #28
  • Aug 28, 2006 2:34pm Aug 28, 2006 2:34pm
Quoting nitman
My money management is trade small enough to have more opportunity to trade again the next day. There is nothing wrong with that. I don't have time to figure what 1% risk is and then figure out how much can I bid to be able to take 40pip loss. Figuring all that out is not going to help me win without winning strategy.
nitman,

Here's a math problem for you: Let's say your account is $10,000 USD and you want to risk 1%. (hint: 10000 x .01 = 100). Now, for the hard part. Let's assume that the EURUSD is $1 per pip and you decide to risk 40 pips (another hint: 100 / 40 = 2.5). This allows you to risk 2 mini lots. Most conservative traders round down.

This calculation should take you about 10 seconds.
  • #29
  • Aug 28, 2006 2:55pm Aug 28, 2006 2:55pm
It might take 10 seconds for a pro like you. But for me, I need to punch everything into my calculator. I trade with the amount of money I'm willing to lose to you. That's that. I don't do any fancy math to let me know my where my comfort zone is.
  • #30
  • Aug 28, 2006 3:10pm Aug 28, 2006 3:10pm
Quoting nitman
It might take 10 seconds for a pro like you. But for me, I need to punch everything into my calculator. I trade with the amount of money I'm willing to lose to you. That's that. I don't do any fancy math to let me know my where my comfort zone is.
nitman,

I respect the fact that you can't do simple math but let me point out one more thing for consideration:

For every system or portfolio of systems there exists an "optimal" amount to risk on your positions. If you risk too little, you will never make money. If you risk too much you will be will be ruined. I have attached an optimal curve showing the pitfalls and benefits of varying your risk size. Trading without knowing your optimum position size is simply playing a game.

Please note that this curve is unique to a particular system and the values will not apply to you. It is highly likely that your curve would be of a similar shape though.

Phil
Attached Image
  • #31
  • Aug 28, 2006 3:14pm Aug 28, 2006 3:14pm
Nitman, That's kind of sad that you trade to lose... Really with just some practice, you could do the same calcs in your head just as quickly. and also even if you have a low win % with good MM you can still come out ahead.

Look if you have a 3:1 reward to risk, you can lose 2 times and only win once and still break even... That is a winning % of only 33%.. Really it is all about the money management...


Quoting nitman
It might take 10 seconds for a pro like you. But for me, I need to punch everything into my calculator. I trade with the amount of money I'm willing to lose to you. That's that. I don't do any fancy math to let me know my where my comfort zone is.
  • #32
  • Aug 28, 2006 3:28pm Aug 28, 2006 3:28pm
Quoting Captain Piptastic
So then it's perfectly acceptable to you to risk 25% or more of your account on each trade as the previous poster implied?
I personally risk 12.5% of my account on every trade. BUT I have a 90% win rate on 30pip stop/35-50 pip take profit trades. I also only trade 3-5 times per month so I need returns.

It's not the amount you risk, it's the overall expectency of the system. A 25% risk per trade system can work, it just needs to be really fricken good.
  • #33
  • Aug 28, 2006 3:57pm Aug 28, 2006 3:57pm
Quoting philmcgrew
Sounds like someone needs to play the money management game. Give this a try. It would be interesting to see a few people post their results.

This is an excel file but had to be uploaded as a .zip file since .xls is not accepted.

I would be particularly interested in seeing how risking 25% of your accout works out.

Phil
philmcgrew,

Thanks for placing the spreadsheet on this thread. I tried the experiment four times as follows:

Trial 1:
Risk 2% of the account per trade. Equity after 100 trades $13,501.00

Trial 2:
Risk $200 per trade (initially 2% of the account). Equity after 100 trades $12,800.00

Trial 3:
Risk $1,000 per trade (initially 10% of the account). Equity after 100 trades $14,000.00

Trial 4:
Risk 10% of the account per trade. Equity after 100 trades $54,723.00

It's interesting that -based on this experiment - if you risk 2% of your account everytime you trade you get almost the same as risking $1000 per trade. I came to conclusion that probably risking a certain percentage of the account per trade would be a good money management approach.

Knowing that the system generates profit 60% I could risk 10% (trial 4) of the account and make that crazy amount of money but I don't think that would be a good idea on a live account.
  • #34
  • Aug 28, 2006 4:04pm Aug 28, 2006 4:04pm
Quoting philmcgrew
...

If you think money management doesn't matter you won't be around for very long. Money management takes the fun out of trading and makes it a business. If you're not interested in money management then simply admit that you are trading for entertainment purposes. I suppose there is nothing wrong with that until you start telling people who are interested in learning that it doesn't matter.

Phil
I quite agree with you. That's why I started this trade. Many people try to find a profitable strategy. The truth is that it's not that much difficult to find a profitable strategy. The key to stay into this business is to stick with boring rules of discipline, money management, and psychology of trade.

Thanks again for helping me out with this thread. I'm still looking forward to see how many people take it serious.
  • #35
  • Aug 28, 2006 4:09pm Aug 28, 2006 4:09pm
Quoting Darkstar
I personally risk 12.5% of my account on every trade. BUT I have a 90% win rate on 30pip stop/35-50 pip take profit trades. I also only trade 3-5 times per month so I need returns.

It's not the amount you risk, it's the overall expectency of the system. A 25% risk per trade system can work, it just needs to be really fricken good.
Taking 90% win rate at face value you still have a 5% probability of a 38% drawdown over 50 trades. That will require a 66% gain to recover.

Beyond that at 3-5 times per month how long have you traded this method at a 90% win rate. What I'm getting at is can you really consider your data set large enough to be statistically valid.
Secret Identity: Bill Sullivan
  • #36
  • Aug 28, 2006 4:18pm Aug 28, 2006 4:18pm
Just read my signature.
If you wish to go to the island of millionaires then you need to cross the occean full of sharks.You have only one boat and few tools with you to keep away these ferocious beings.
As long as you remain in the boat, you are safe no matter what you do while sitting in its limits and where you sit.It is your wish to use tools to keep away the animals or to drill holes in your boat.But one thing is sure if boat is lost then you and your dreams will get first wet with water and the water will be red with tears of repentence.

Just my humble words,

kolachi
  • #37
  • Aug 28, 2006 4:44pm Aug 28, 2006 4:44pm
Quoting Captain Piptastic
Taking 90% win rate at face value you still have a 5% probability of a 38% drawdown over 50 trades. That will require a 66% gain to recover.

Beyond that at 3-5 times per month how long have you traded this method at a 90% win rate. What I'm getting at is can you really consider your data set large enough to be statistically valid.
I hear exactly what your saying, but you have to run the other side of the equation as well. How many of those 50 trades will be consecutive winners? Compound 15-25% on each trade then take the drawdown. Hell, go ahead and take it twice in 50 trades. 38% sucks, but in the grand scheme of things it is insignificant.

Not that it makes much difference to the arguement, but since you asked I'll answer the rest:

The data set isn't really relevant to my trading. What I do isn't based on the probability distribution of a pattern. I trade orderflow and as a result, operate at a different level. There are certain things that are possible and there are things that are not. I generally only trade when it is impossible for my trade to lose. The trades I DO manage to lose are the result of my own personal shortcomings; impatience, greed, fear, etc..

So as probably as a back to back maximum loss may seem statistically, it fails to account for how I personally make trade decisions. After a loss, risk is tightened and only perfect opportunities are taken until a new peak is hit (1-2 trades).
  • #38
  • Aug 28, 2006 4:52pm Aug 28, 2006 4:52pm
This is what I use, I trade with risk\reward ratio of 6, so if I dont want to lose money I need to be wright just in 15% of trades, in attachement is excel file in which you need to enter balance, % of risk\trade and risk in pips\trade, and you will get amount of units\trade
Attached File(s)
File Type: zip Risk management1.zip   2 KB | 334 downloads
  • #39
  • Aug 28, 2006 4:58pm Aug 28, 2006 4:58pm
Quoting forexshark
This is what I use, I trade with risk\reward ratio of 6, so if I dont want to lose money I need to be wright just in 15% of trades, in attachement is excel file in which you need to enter balance, % of risk\trade and risk in pips\trade, and you will get amount of units\trade
I think a R:R of 6 is fantastic but most people that I meet simply make their target 6 times bigger than their loss and if you do that you're fooling yourself. I think risk and reward are absolutely critical but I often question how someone knows the market is going to a specific location.
  • #40
  • Aug 28, 2006 4:59pm Aug 28, 2006 4:59pm
Quoting Darkstar
Not that it makes much difference to the arguement, but since you asked I'll answer the rest:

The data set isn't really relevant to my trading. What I do isn't based on the probability distribution of a pattern. I trade orderflow and as a result, operate at a different level. There are certain things that are possible and there are things that are not. I generally only trade when it is impossible for my trade to lose. The trades I DO manage to lose are the result of my own personal shortcomings; impatience, greed, fear, etc..
The rest of your answer absolutely makes a difference. A probability distribution still applies to you. You don't simply escape probability because you don't take "mechanical" setups.

Quote
So as probably as a back to back maximum loss may seem statistically, it fails to account for how I personally make trade decisions. After a loss, risk is tightened and only perfect opportunities are taken until a new peak is hit (1-2 trades).

So then you don't risk 12.5% per trade?
Secret Identity: Bill Sullivan
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