Seeking views on Money Management

Trading Discussion Risk Management Practices
1

So as we all know, the holy grail lays buried deep within the vaults of money management. Doesn’t matter how good or how bad a system is, with the right money management in place it can succeed. So please when replying don’t focus on the system just comments about money management.

Now say I had developed a system and within the system I had 10 different variants across 3 pairs that met my performance criteria. Say, return at least 1% a day, max draw down 20 to 30%. Together as a basket the system must still maintain max draw down of 30%. Some variants preform better than others.

Now say I have $10000 to invest. How would I do it?

Do I open just one account, whack 'em all in that and let compounding take over. Or do i reduce my risk by opening 2,3,4 or 5 accounts and whack pairs of higher and lower performance together or as combinations. Do I run just the best 1 for each pair in a separate account for each. Or have 10 account, one for each variant and thus reducing my overall risk to 3% in theory.

looking forward to some feedback

2

From a statistical standpoint your overall risk is the same provided you trade the same position sizes as on a single larger account. Reducing the position sizes on the individual accounts to lower your risk would be the same as just trading smaller positions on one account.

3

Bob, I have seen this statement from many sources, including some powerful influences in the trading community. I have come to respectfully disagree. Most of us know better than to look for a grail, but our more realistic search is to find something with a positive expectancy. Just my opinion, but the best money management in the world will not save a method with negative expectancy. You will just lose more slowly and in an orderly fashion. Let’s say you back a negative expectancy and decide to risk no more than 2%. Incurring losses, you will reduce your risk proportionately. This is money management you will often see recommended, but how can it possibly be profitable? Again, just my opinion, but we need a positive expectancy either in risk reward ratio, winners to losers, or both. To me, that is the slight edge, coupled with good mm that will make us long-term profitable. Frankly, my own money management is a broad-brush approach summarized as, “just don’t go crazy.”

My thoughts are more appropriate for those looking for a sustained career in trading. There are certainly other approaches to the market and I continue to be involved in those with small portions of my available investment capital. In fact, I am currently running a small account that is up 125% since May 2, http://www.myfxbook.com/members/pipwoof/mbo/868585.

For those who want to take a speculative, high-risk approach, there are other ways to think about trading. For example, if a casino would not limit your bet size, what are the odds you could pick Roulette color outcome five times in a row? If you look at a probability table, runs of five consecutive black/red occur frequently. Let’s break our $10,000 into ten parcels and go to a casino that doesn’t limit bet size. Start with $1,000, double the bet size after each win. If you lose, start over. The open question is whether we would be fortunate enough to hit a run of five, resulting in winnings of $32,000 before we tried ten times and lost all our stake.

Most experienced traders have a negative view of Martingale or modified Martingale, but that view may depend on your trading objectives. We can conclude that all Martingales will EVENTUALLY fail because we will inevitably run into that streak that ties us into so many positions we get the margin call. “Eventually” becomes the operative word here and poses the question of what we might be able to do before “eventually” comes along. Starting with $1,000, can I Martingale my way into doubling my account every week for only ten weeks? If I can, I will have a million bucks in a couple of months. And, if I lose that $1,000, can I just take another grand and start over? If I have ten shots for Martingale to survive the margin call, which will happen first? Will I hit my ten winning weeks and be smart enough to walk away or will I try ten times and lose every time? Not to also factor in what I am going to feel like when my bet size is $128,000, $250,000, or $500,000. Another way to play this game is to go for only three weeks in a row. That seems more possible. Turn $1,000 into $8,000, break that into eight more tries, repeat. We are sure to find these higher risk ideas will require some combination of skill and luck to succeed. No matter how good you are, there are some days when the gods of Roulette just don’t cooperate.

I do appreciate you opening the discussion. I will look forward to hearing thoughts very different from mine.

Caveat, caveat. I am in no way suggesting or recommending that anyone try these higher risk approaches. These are especially dangerous for inexperienced traders and for those with limited discretionary capital. When I contribute to BP, I bridle the racehorse and try to offer something grandma might find “reasonable.”

4

You may want to re think your opinion and where the holy grail lays. You asked for those who respond to your post not to concentrate on the system but I think you’ll find that anyone giving you an opinion on money management based on where you think success lays will have to address system. T

here is a reason that most successful traders say to be successful long term you need to have a trading method that will give you more positive returns than negative in the long run by putting the balance of probabilities on your side. As well with a money management system that will protect your capital so you don’t go broker while at the same time increasing your capital in the long run. Lastly apply patience and discipline while executing your trade plan. There is no one that is more important than the other, doing one out of the three or two of the three is almost the same as doing none.

You can not accurately predict your rewards when trading, you can only measure your risk. This is why you see traders applying different risk strategies. Some enter 1 trade, some enter multiple: no difference; when it works your a genius when it doesn’t, your not. Say you’re using a 50% retracement strategy. You determine that the pair you are trading is in an uptrend, so you wait for currency to retrace to 50% and jump in. You thought before you entered that since the pair is in an uptrend, then the pair has to go from the 50% level where you entered to the zero level to continue you the up trend, so your take profit would go to the zero level. So that’s where you put your first take profit, as well as tape profit, your stop loss would be placed at whatever % you are prepared to risk on this trade only or several other trades based on the probabilities would be successful. There is no difference with regard to risk, it has to be based on your account balance

Anyhow my 2 cents. Again sorry about addressing your comment on where success lays, but I don’t see how anyone can address the money management without addressing the other 2 parts of the strategy.
Gp

5

My sentiments, exactly. Well said.

6

Hi Bobbill,

I will be brief.

No matter how you segregate your capital, you should have a max % risk per trade/day/week/month etc. - Work on developing that figure.

  • 30% drawdown sounds like a little too much exposure.

Remember that these are still crucial parts of your trading system and if you adjust your money management rules, you might as well address entry and exit criteria too.

7

Thanks to all who have answered. Your views are appreciated greatly.

My thoughts on the “Holy Grail”. Well, mmm, it exists! But most of us just don’t know what it is. We perceive with our minds instead of seeing with our eyes. The grail is just a personalized abstract so it is up each of us to travel the road to discovery. I’m happy to call my system my grail.

So a bit more about it for this thread. There’s nothing complex about it. I simply scalp donchian channels. I like to call it turtle scalping. This allows me to have tight SL and an elevated exposure. Depending on which variant 3 to 4 % but that’s of free margin vs the norm of equity. Can’t give a R:R ratio as I don’t use a TP. Even with the tight SL I hit between 80 to 90% win rate. Because of my entry signal I’m usually in the market when those “bigger” pushes occur and can capture that movement, the rest of the time I just chip away, follow the rules and capture a couple of pips here and there… Again much like the turtles.

So like I said, there are 10 variants across three pairs that all deliver. I am currently testing all 10 variants in one small micro account to collect live data. I also collect screenshots on every trade open, close and once every four hours for post trade anaylsis.

But the power of the system comes from money management. By accepting that the system will fail and will go into draw down means we stay in the game ready to reap the reward for when things run better. And by taking a higher (although not extravagant) risk a return of 1.5% day is maintainable for each variant.

But when does risk turn into greed? Risk == return == greed ==ruin. Thoughts?

Is it being greedy to basket them together. I’m starting to think it is. Which is why I think grabbing the best four and splitting them into two accounts may be the way to go

8

+1 on that. It makes no sense to open a different trading account for each position. I can understand opening a different account if a trader trades two different strategies and wants them separated. Now from a psychological standpoint some traders may find it better for them and in the end it all depends on what the trader prefers.

10

If you want to get on top of your finances, a budget is a really good way to start. It’s just a record of money you have coming in (from things like your salary or wages, pensions or benefits) and payments that you make (such as your rent or mortgage, insurance and Council Tax as well as living expenses and regular and irregular spending).

11

Good money management can mean many things – from living within your means to saving for short and long-term goals, to having a realistic plan to pay off your debts. Read on if you want to learn how to set up a budget, make the most of your money, pay off debts or start saving.

12

Hi, just found this post. The link no longer works, do you still have this account?

13

In light of the swissy debacle and the broker problems it caused, would anyone consider it prudent to open more than one account to reduce the risk of your broker going bust or having difficulties that inhibit your trading, albeit temporarily?

14

In response to the original post…

Don’t over complicate things. If you trade for example different asset classes as asset classes may require different risk profiles, it makes sense to seperate the account. E.g. You may trade Coffee, Cocoa, Gold, Oil and a few currencies, maybe even equities. In whicha case you can allocate capital to each portfolio, e.g. Gold and Oil may be in one, Coffee and Cocoa in another 5k a piece (just an example).

Beyond that no point in splitting up your account if you trade only currencies. Of couse do what suits you, in the end it is your idea.

On the other hand money management for a small account is simple, decide a Dollar risk per trade and ensure you are making money. Most people can manage risk, they just can’t follow the rules because that is boring. Also most traders are trading so lightly that they are not maximizing their edge. Remember 3 or 4 good trades will determine a whole months gains, at least that is the case for me.

Most of the time I am having to breakeven trades or cut losses, then I get that stellar trade and all of sudden I am up hugely and then I take a break to avoid donating it all back straight after. In any case just agree your Dollar amount in your mind. Honestly, doesn’t matter the system as long as the system has a logic it will have an expectancy, that can manipulated to generate a return.

Good luck anyway. No holy grails…Just ask Meredith Whitney

15

Seems so long ago I asked this question. Learnt alot since then lol

16

Use the money management system that has zero losses, its very simple to use, it only has 1 rule: don’t trade!
follow that #1 rule your guaranteed to never lose a penny!

17

Trading or not, you are going to lose some money. I think trading gives you the opportunity to plan for the future. Ideally $1,000 would have been a lot of money 50 years ago. However, had you kept that money rather than invest it, you would have incurred what investors call opportunity loss.

18

we can invest our money in other trader. when you join in broker you will find and talk with some great trader. in liteforex i has join in VIP Member. i has some friend in this broker. i view someone. i invest money to them. i put a part in paam account. we can control our money easy

19

I personally trade 2% of my account size (including open trades) at the given time of when I place the trade.

20

Well, 2% for all open trades sounds quite small. Personally I do it 1%-2% per trade, so sometimes it is about 10%-15% of my account.I have never had more than 20% open trades in reference to my account value. But then when I do this I make sure that the stop losses are placed well, so that I do not risk margin calls.

21

Maybe I wasn’t very clear. I trade 2% of my account size [B]per [/B]open trade.