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Can money management make Forex trading profitable?

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  • Can money management make Forex trading profitable?
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  • #1
  • First Post: Oct 12, 2016 4:31pm Oct 12, 2016 4:31pm
I asked this question myself, and also tried to back it up with some little simulations.

I was able to trade according to the rule of the selected strategy for quiet some time. Then I started to play around doing things that weren't proven. The profit I was able to made, start disappearing until it got to the point of complete account wipe out.

I made this little simulation in excel, because i want to see...

"what if" I am able to be consistence with the money management over long period of trading lifetime (>1000 trades).

"what if" The rule i set myself to begin with, doesn't change... and stay what it should, over the whole trading lifetime.


Will I be able to stay profitable in the Forex market?

This is what the simulation told me...

Attached Image

Attached Image


The simulation I made will random the outcome of the trades based on the predefined Win/Loss Ratio. Which purely depend on the trading approach (strategy) of the traders themselves.

The result above shows the trader who strictly followed the money management rules, and chose to only risk 0.5% of the capital in trade (assuming the trader only open 1 order at a time, hence DD of 0.5%) and set take profit level according to the Risk/Reward ratio of 2. Even if the trader managed to win only 38% of the time, the trader is still be able to make a total net return of over 100% in a long run.

Based on the same simulation input data. I have also made a statistics preview of over 20 traders that shows the outcome of the strategies that given different win percentage.

Attached Image


The simulator had taught me about the power of money management, and the necessity of the ability to stay consistence with the chosen trading strategy.

Quote
Now that the money management is out of the way, it is time to find a strategy that given at least 34% win rate.


If any of you feels like to play around with the number, just grab the excel file and play around with the input values. The statistics you have to implement it by yourself.
Attached File(s)
File Type: zip MoneyManagementSimulator.zip   4.3 MB | 2,394 downloads
  • #2
  • Oct 12, 2016 6:03pm Oct 12, 2016 6:03pm
nice designed and useful excel sheet.
you can easily calculate your minimum winrate to stay break-even with this calculation:

min.winrate = 1/ (1+ R:R ratio)
e.g. 1/(1+2.5)= 0.285%

dont forgett to add spread so a 1.0 RR needs over 50% winrate.
  • #3
  • Oct 12, 2016 7:16pm Oct 12, 2016 7:16pm
Can money management make Forex trading profitable? NO!

I am sorry to burst your bubble, but it seems to me that you are just another lost soul fallen in the meat grinder called Forex! Please, stop preaching the common "wisdom" about risk to reward ratios 1:2 , 1:3 and so on...! You only confuse people, by spreading false information. Your simulations have no connection to the reality of markets. You try to derive some conclusions based on semi-random Monte Carlo simulations. And you miss the most important part - the edge.

Let me clarify some things.
True, money management is very important! I even created separate thread on this topic to share my experience and ideas...... HOWEVER, money management by itself will not make you profitable.

The risk : reward ratio by itself is irrelevant. In fact Win % is far, far more important.

The ONLY way to make money from trading as a retail trader is to have a strategy with an EDGE!
Not only that, but this edge MUST be larger than the transaction cost. (otherwise your strategy is useless).

The only way to find real edge is to search for patterns and elements of NON - RANDOM crowd behavior!
If your strategy does not provide any edge, then the expectancy per trade will equal exactly 0 (ZERO) minus the transaction cost. In the short term you can have some outliers, but as the trade sample grows, the law of large numbers will come into full effect!
In fact, with 0(zero) transaction cost, it is almost impossible to lose money, as long as you keep the risk per trade low. In a large sample, the account will stay at break-even.

Most traders who lose money consistently, will be surprised to learn the their losses are not caused by terrible trading. They are caused by the transaction cost! (commissions, spreads, swaps, slippage... and in some rare cases by fat tail events, aka flash crashes). The transaction cost slowly eats their account because they don't have any edge!
If you are losing money, try this: calculate your total transaction cost, since the first day you started trading FX, and then compare this to the total amount of money you have lost so far. You will be surprised (as I said).

Here is a simple proof. This EA
Attached File(s)
File Type: ex4 cost Experiment .ex4   9 KB | 766 downloads
opens trades randomly (no edge).
Notice that no matter of the risk:reward ratio, the expectancy per trade stays the same. (equal to the spread in the tester).
And guess what? You can use ANY types of variables as entry and exit, and result will not change! The expectancy per trade will stays the same. Because there is no edge!

Lets hope that some people will FINALLY see the light, (although I doubt it).
  • #4
  • Oct 13, 2016 6:46am Oct 13, 2016 6:46am
Quoting alphaomega
The risk : reward ratio by itself is irrelevant. In fact Win % is far, far more important.
The strategy i used gave me over >70% win rate, but i still managed to blow everything up and still have >70% win rate on record (check my trade explorer). I personally think win% alone is not that important. I have seen the published analysis from FXCM about their customers trading behavior. They said that their data shows that overall traders were able to maintain 60% win rate, but they are still not making profit in Forex market. Because the amount of the return of their winning trades are far lower that the amount of losses (R:R<1)

define:edge
Could you maybe be more specific about an "Edge" in Forex trading? What does it mean to have an edge in Forex trading?
  • #5
  • Oct 13, 2016 11:49am Oct 13, 2016 11:49am
Quoting natthapol.v
{quote} The strategy i used gave me over >70% win rate, but i still managed to blow everything up and still have >70% win rate on record (check my trade explorer). I personally think win% alone is not that important. I have seen the published analysis from FXCM about their customers trading behavior. They said that their data shows that overall traders were able to maintain 60% win rate, but they are still not making profit in Forex market. Because the amount of the return of their winning trades are far lower that the amount of losses (R:R<1) define:edge...
In fx trading the definition for "edge" is related to the average expected profit per trade. As I already explained in the previous post, if your trade expectancy is 0, then you have no edge and the trading cost will eat your account over time. In fact, based on your stats, RR, W% and the leverage you use, you can calculate how many trades(on average) you have to make in order to lose the whole account.

To have an edge, means to have some kind of information advantage over the other market participants. This advantage slightly shifts the profit expectancy per trade into positive territory.

You have to look for repeatable non-random patterns. These patterns can be purely technical, purely fundamental, or combination of both.

For example if you become very good (better then 99% of all market participants) at identifying technical areas of support and resistance this will give you serious advantage.
If you buy at support and sell at resistance and 70% of the time the trade goes in the green withing the first few minutes - You have real edge! So, over time as long as your MM and risk strategy is correct, you will make money!

Another example: If you learn how to identify areas where there is high probability of stop clusters this will give you advantage! Every time when the price start to approach such cluster area you can profit from the stop run.

Another example - if you have very good understanding about the fundamentals, and you can make relatively accurate forecast about the political and economic trends in the near future - this will give you advantage! You will be able to profit from longer term bull markets, bear markets, and market crashes.

Another example - If you can notice market bubbles(earlier than most people before they burst), this will give you advantage!
------------------------------------------------------------------------------------------
There are many other more complicated examples, but I think you can get the idea.
  • #6
  • Oct 13, 2016 12:10pm Oct 13, 2016 12:10pm
Just to make something clear on the topic.

In general, the reality is that there are no profitable systems and strategies! There is only profitable traders!
But for simplicity, let's just say that there are profitable strategies.
The main principle is - that you can ruin good strategy with bad MM, but you CANNOT make bad strategy profitable, by using good MM.

I hope this is clear.
  • #7
  • Oct 13, 2016 12:34pm Oct 13, 2016 12:34pm
Quoting alphaomega
Just to make something clear on the topic. In general, the reality is that there are no profitable systems and strategies! There is only profitable traders! But for simplicity, let's just say that there are profitable strategies. The main principle is - that you can ruin good strategy with bad MM, but you CANNOT make bad strategy profitable, by using good MM. I hope this is clear.
Thanks AlphaOmega for the good set of definitions for "edge" in Forex trading.

Now you really show me what I should be looking for when trading in Forex market. With limited information available to the retail traders, i believed finding the strong S/R should be the way that I should give it a try. I really need to go back practice identifying those levels
  • #8
  • Oct 14, 2016 8:08am Oct 14, 2016 8:08am
Provided you have an edge which gives you at least a 50/50 win/loss ratio, then you will make money provided your winners are bigger than your losers, and yes, if this is so, then even a 50/50 win/loss ratio can be very profitable, as indeed can a negative win/loss ratio as long as your wins are consistently larger than your losses. Where many traders trip up is by letting small losing trades become big losing trades, which can easily lead to complete emotional meltdown. Anyone who has learned how to correctly read price movement can make a lot of money trading the markets, but they have to have the self-discipline necessary to comply 100% with their money-management principles. No one knows this more than the owner of this thread.
  • #9
  • Oct 14, 2016 8:22am Oct 14, 2016 8:22am
Quoting natthapol.v
{quote} I have seen the published analysis from FXCM about their customers trading behavior. They said that their data shows that overall traders were able to maintain 60% win rate, but they are still not making profit in Forex market.
Found the analysis. It was actually from DailyFX here
  • #10
  • Oct 14, 2016 8:24am Oct 14, 2016 8:24am
Quoting cat
Provided you have an edge which gives you at least a 50/50 win/loss ratio, then you will make money provided your winners are bigger than your losers, and yes, if this is so, then even a 50/50 win/loss ratio can be very profitable, as indeed can a negative win/loss ratio as long as your wins are consistently larger than your losses. Where many traders trip up is by letting small losing trades become big losing trades, which can easily lead to complete emotional meltdown. Anyone who has learned how to correctly read price movement can make a lot...
That is exactly what had happened to my account. I let the small loss ran bigger and larger, because I thought the price will reverse here and there....
  • #11
  • Oct 14, 2016 8:40am Oct 14, 2016 8:40am
Quoting natthapol.v
{quote} That is exactly what had happened to my account. I let the small loss ran bigger and larger, because I thought the price will reverse here and there....
Then welcome to the land of the losers, because if you continue doing that, you're doomed in this business. Set your SL, and never widen it when the trade starts to go against you, and get out as soon as you think you are wrong. If you panic and your brain goes into shutdown at times like that, then you shouldn't be trading at all. It's not just your cognitive skills or lack of them that kill traders off in this business, it's the mental ones as well.
  • #12
  • Oct 14, 2016 8:51am Oct 14, 2016 8:51am
Can money management make Forex trading profitable?

Money management, no. Trade management, yes.
  • #13
  • Oct 14, 2016 9:25am Oct 14, 2016 9:25am
Post #40
  • #14
  • Edited 11:11am Oct 14, 2016 10:58am | Edited 11:11am
There are two main reasons why most traders hold on to losing trades. And these reasons are connected.

1. Fear which is caused by uncertainty.
2. Uncertainty which is caused by lack of accuracy.

Ask yourself the question why most traders use very wide stops or in many cases no stops at all?

Most traders do not have the skills (or the technique) to identify accurately the levels of support and resistance. For the most part they fire random shots in the dark. And because they realize this lack of accuracy, they use huge stops. (To give more room for the trade to "work")
On the other side, the professional traders use very tight stops. Why? Because they have better skills. They can identify the potential support and resistance levels with high accuracy.

Think about that! Let's say you see good technical level with high probability for support. Let say 50. This means, that if the price hits this level, there is a high probability that other traders will buy and price will bounce up. But there is no guarantee!

When the price hits 50 you quickly open long position.
Now you are waiting for these other big traders to buy.

However, if there are no buyers at this level how long you are going to wait before you close the position? Also, how many points you are willing to give?

If you are long at 50, and 2 minutes later the price is at 48 what are you going to do?
Another 2 minutes later, the price is now at 45! What now?

Do you remember? The original idea was, that the other traders will buy at 50! But now it seems they think otherwise. The solution to this problem?
Cut the loss and MOVE ON!

Now many people will say, but there is still chance for the market to turn around.
5 pips stop? This is way to small.......I say B.S.! Excuses, excuses, and more excuses!
Cut the loss and MOVE ON!

The next good opportunity is just around the corner, and you are still attached to this losing position?
Cut the loss and MOVE ON!

If you buy and the trade is not in positive teritory withing a few minutes - GET OUT!

This is why I believe that scalping should be the primary method for most small traders. Because ALL good positions begin as a scalp! Even if you are trading longer term.

You identify the setup, wait for the price to hit your level, and then open the trade with maximum hard stop 5-15 pips depending on the volatility.

If the position is not in the green withing a few minutes - you get out!
If the position shows profit - you have options!
You can take profit.
You can move your stop.
You can add to the position.
You can take partial profit, and hold on to the other part.

All positions start with tight stop, and some of them have the potential to develop into huge winners.
You have small limited downside risk, and huge unlimited upside potential.
But in order for all this to work you need accuracy!
And the only trading style where such accuracy can be achieved is scalping.

This is the path to consistent profitability!
  • #15
  • Edited Oct 16, 2016 2:15am Oct 15, 2016 4:46am | Edited Oct 16, 2016 2:15am
Quoting alphaomega
There are two main reasons why most traders hold on to losing trades. And these reasons are connected. 1. Fear which is caused by uncertainty. 2. Uncertainty which is caused by lack of accuracy. Ask yourself the question why most traders use very wide stops or in many cases no stops at all? Most traders do not have the skills (or the technique) to identify accurately the levels of support and resistance. For the most part they fire random shots in the dark. And because they realize this lack of accuracy, they use huge stops. (To give more room for...
I've always been looking forward to read your taught on MM. Do you have any book you've authored on Amazon? If no, please consider publishing a book I'm waiting to buy it.
  • #16
  • Oct 16, 2016 4:11am Oct 16, 2016 4:11am
Quoting natthapol.v;
"what if" I am able to be consistence with the money management over long period of trading lifetime (>1000 trades).
Quoting natthapol.v;
The result above shows the trader who strictly followed the money management rules, and chose to only risk 0.5% of the capital in trade (assuming the trader only open 1 order at a time, hence DD of 0.5%) and set take profit level according to the Risk/Reward ratio of 2.
I want to give my additional input here is that the correct term you are describing here is risk management. When you say 'money management', i really don't understand what the heck you are talking about. and this would be confusing to novice traders.

Quoting natthapol.v;
The simulator had taught me about the power of money management, and the necessity of the ability to stay consistence with the chosen trading strategy.
No. The simulator shows you 1. have a money making system (you failed to mention this one), and 2. the risk management you have in this system the key factor to keep you in the game from draw down. 1. makes the money, 2. reduce your lose. Having the good risk management without a working model /system will eventually reduce your account to ZERO.

Quoting natthapol.v;
define:edge. Could you maybe be more specific about an "Edge" in Forex trading? What does it mean to have an edge in Forex trading?
Quoting natthapol.v;
The strategy i used gave me over >70% win rate,
This is your edge. the 70%+ win rate. You already have your edge over the market. Now protect your profit with the risk management plan which is equally important.

Quoting alphaomega
There are two main reasons why most traders hold on to losing trades. And these reasons are connected. 1. Fear which is caused by uncertainty. 2. Uncertainty which is caused by lack of accuracy.
Agree, but I thought the reason is mostly people don't admit their on the wrong side of the market and afraid to take a lose while knowing his position can potential turns into a jackpot winner any second as long as he hold on to it.

Most failed trader i encountered has big ego but fairly little knowledge in risk management and emotion control.

I'd hold on to my position for more than just a few minutes before i close it. But if you are doing it for the day trading or scalping, that's perfectly fine.

I like the examples you are bring in here. Cheers.
If u luv happiness, start w/ discomfort, make friends w/ pain and failure.
100 Hits 0 Miss All Time Return: 35.8%
  • #17
  • Oct 16, 2016 4:27am Oct 16, 2016 4:27am
It is easy to have good management skills when you already have edge. If you don't have that first, you cannot even know what proper money management is, because it is tightly connected to the system you trade. You have to incorporate it in the frame that you have already started to build. On it's own it's useless.
  • #18
  • Oct 16, 2016 4:59am Oct 16, 2016 4:59am
Threads like these are interesting, because you can see how much misinformation there is in retail forex trading. It's no surprise that 95% of traders lose money.

1) Money management IS important, but it is useless without an edge. You can have the best money management system ever and go to a casino, but in the long run you will always lose to the house. How much should you risk per trade? That depends on how aggressive you are and what your win rate is. If you have a low win rate, risking 2% or even 5% per trade will result in a significant drawdown because you have a higher probability of having extended losing streaks.

2) Win rate on its own means absolutely NOTHING. You want to have a 90% win rate? Simple. If you risk $9 to make $1 you will have a 90% win rate. It looks impressive on paper and will convince idiots that you're profitable. (Have a look here on FF at all these 80 and 90% win rate traders ). But, you can have a 40% win rate and be profitable, if you're making $2 for $1 of risk.
Do this experiment: Add the average pips you make per trade, to the average pips you lose per trade. Now divide 100 by that number. Now, times the answer by the average pips per loss. That is the flat win rate for your strategy. If your actual win rate is more than 10% above the flat win rate, you might have an edge. Assuming that you've used a large enough sample size (less than 100 trades doesn't count!)

3) Ask yourself this: Where is your edge coming from? When you win a trade, who's money are you taking? Are you riding in the wake of large bank orders and picking up the pieces of the traders being steam rolled by them? Are you stop hunting with the pro's? Are you counter trend trading at critical points when amateur traders are trying to get into the trend too late, and profiting off of their stops?
Remember guys, nothing is free. The money you make needs to come from somewhere. To be a successful trader, you have to beat the market. And what is the market? The market is just made up of other traders and institutions. You have to beat them.

There are so many bullshit trading systems here on FF that simply don't work and have no edge at all. If you want to succeed, you have to face reality and treat everything you see with skepticism. Do the math. If it looks too good to be true, then IT IS too good to be true. Forget about all these system people are peddling that use 10 different indicators and have complex rule based entries.
Just look at the markets. Look at what the correlated currency pairs are doing. Look at the news. Look for the banks getting in and out of the market to fill their client orders. Look at that super obvious zone where all the bad traders have put their stoplosses and think about what means. And now look back at your chart and whatever indicator you prefer, and ask yourself whether you should take this trade. I promise, if you begin to think like this you will be well on your way to joining the 1% of successful traders.
Better to run, than curse the road
  • #19
  • Oct 16, 2016 6:03am Oct 16, 2016 6:03am
Is there any proven formula for risk management? Some say 1-2% is good. I do not believe this. There are times we under utilize our free margin in the name of risk management. If you have practiced enough and have strategy that enables you to catch trend at the beginning, using 1-2% is complete nonsense. If you are in a "Red" zone or drawdown, we may use such % or less. If we have taken our capital higher enough we can increase our risk, move our SL to BE as soon as possible. And do not overtrade, because you know the risk you have taken.
Make all mistakes in demo and rain in pips in live account
9jatrader All Time Return: -5.5%
  • #20
  • Nov 9, 2022 3:51pm Nov 9, 2022 3:51pm
Money management is the only way to make money from forex. Without it, you will always lose in the end.
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