Looking for Feedback on my Money Management Approach

Beginner Questions
1

Dear all,

Following some invaluable feedback from Clint yesterday, I decided to look into risk/money management and see how I can optimize my gains while minimizing my potential losses and associated risks.

I’d therefore very much so welcome feedback on my current risk/money management approach:

I work with $1,000 in a demo account, since this is how much I will have to work with when I go live. I trade USDJPY buying no more than 2,500 of the currency for $50 (which makes me wonder if I’m not overleveraging myself). At any given time, I don’t risk more than 5% of my margin, meaning that with a $2,500 position, I will have 950 margin to avoid margin calls).

In fact, the only reason I even use leverage is because otherwise I would be trading pennies with a $1,000 account - which, while doable, isn’t an optimal strategy as I discovered by reading this forum.

I usually set the stop-loss at about 5% of the entry price, although I reserve the freedom to adjust that to accommodate for anticipated trend patterns (e.g., if I feel it’s going to drop a little before it picks up by a lot - as suggested by the emerging trend, I may lower my SL somewhat to ensure that it doesn’t get triggered prematurely).

Finally, since I live in Europe and since New York opens when I’m at work and therefore cannot focus fully on the market, I make it a rule not to have any positions open with Dow starts trading, due to possible downward flukes.

Your constructive criticism is, as always, appreciated ('specially you, Clint - gimme that cold shower again if you think I need it!)

2

I think you’re on the right track, but I do have some suggestions…

First, if you’re trading a set percentage of your account per trade, like you say, then stop worrying about things like leverage and margin calls. At 5% risk per trade you’ll never even come close to a margin call, so all it does is clutter up your thinking.

Secondly, I highly disagree with your decision to adjust your stoploss. I’m a firm believer that trades should be planned out in advance, and if you need to move a stoploss it’s because you didn’t set it correctly in the first place. :slight_smile:

If you move your SL then you aren’t trading 5% of your account anymore, 5% is already on the high side of what most people would consider safe, so increasing that is not a good idea.

3

Also, if work is interfering with your trading then you’re probably working on too low of a timeframe. Trading 4H or Daily charts may be better for you. :slight_smile:

4

Hi Phil,

Thank you VERY much for your feedback. With regards to work interfering with my schedule, you’re spot on - however, I’m choosing to trade on shorter timeframes for the time being simply because I get to see more trade patterns by looking on what, in longer-term, would be a tertiary trend. I may choose to do it differently when I go live - however, for the time being, I think it’s a more useful learning experience to be exposed to as many different trends and market situations as possible to improve my ability to spot and analyze emerging patterns.

Thanks for clearing up the whole leverage thing for me - certainly gives me one less thing to worry about!

And you’re right about SL - I think a lot of it comes down to inaccuracies on my part in predicting trend patterns and, most importantly, exactly how low the price will drop before it rises again. Well, every day in every way you learn something new, right? :slight_smile:

5

I second the part about using a 4h tf. I know you think that the lower timeframes will give you more chances to see patterns but I don’t think that’s necessarily true.

Many say that anything under the 4h is noise…so there may be times that lower timeframes don’t exhibit the same types of patterns you’d have on the 4h.

Also, I don’t know about you, but it’s tough spotting patterns for me. Even on a 4h chart it takes me a while to see all the different approaches theri are to a chart. If I had to do that on say, 15 or 30 minute chart I’d go crazy.

6

Hey, George

On your “Excited Newbie” thread, TrevPick accused me of “destroying” you.

[B]Glad to see that you’re not destroyed![/B]

Regarding the question you asked on this thread, I agree with Phil.

(You can pretty much take anything Phil tells you — straight to the bank.)

Just one other thought: The primary objective of money management is preserving your trading capital.
Don’t let one bad trade wipe out the profits from a whole string of good trades.

Keep posting.

Clint

7

I agree with Virtecs. Low TF charts are not just a faster version of higher TF’s. Patterns are more frequent on lower TF’s, but they also are less reliable because of noise and news spikes…

If you want to go lower you can use 1H charts, but using anything less than that as training for higher TF’s is going to drive you insane. :slight_smile:

8

Thanks Clint!

Now would you mind telling that to my wife?? :smiley:

9

[B]Dear Mrs.838,

Phil knows what he’s talking about. You should always listen to Phil, and take his advice.

Very truly yours,

Clint[/B]

p.s. - Phil, you can send the $100 to my offshore account.

10

@Clint: It takes more than a healthy dose of constructive criticism to kill off my enthusiasm! Prior to FOREX, I was heavily involved in Internet Marketing, where you could wait for months before seeing any return on your investment - and it would be a miniature one at that.

So to me, the notion that you can deposit $1,000 and turn that into $1,020 within 24 hours is nothing short of miraculous, and certainly lucrative enough to warrant perseverance and persistence.

With that said, here’s one concern I have with 1h+ charts, one that I am sure the community here will be happy to address.

If the 1h chart shows a clearly bullish market, then it sure is good news - we know it’s heading up and can therefore make investment decisions accordingly.

But what if it’s going down? On a 1H chart, you would see a sharp movement downard. However, if zoomed in to 15M or even 5M intervals, you would see that this sharp movement is actually a collection of zigzags, all bouncing up and down but closing lower each time.

In my limited newbie understanding, money can still be made in these zigzags by buying at the bottom and selling when it hits the expected top. However, if I were working with a 1H chart, I would choose not to buy USD at all, simply because it would show only a consistent move downard, and not the zigzags and the profit opportunities that come with them.

What do you think? More newbie thinking? :slight_smile:

11

Yep, more newbie thinking! :slight_smile:

Price moves in waves on all timeframes. The higher the TF you go, the less frequent, but more predictable, the waves become.

Here’s a test for you. One of these charts is a 1 minute GBP/USD chart, and the other is a weekly GBP/USD chart. Can you tell me which one is which?

As you can see, both charts are equally “wavy”, the only difference is the time span. The 1M takes place over 7 hours, but the weekly chart takes place over 7 years!

The problem is you’re comparing 5M and 1H charts, but you never shifted your [B]thinking [/B]from 5M over to 1H charts.

Those same waves are there on both charts, but while you may have 30 minutes between waves on a 5M chart, you’d need 5 hours on a 1H chart.

By the way, just in case you’re wondering the top chart is the weekly. :slight_smile:

12

Hi, George

I saw an interesting demonstration once. A series of price charts were put up on the screen, each one showing a clearly defined channel — some channels were ascending, some were descending, and one was basically horizontal. All of the prices, all of the dates and times, and all other labels had been removed from these charts, so that the audience couldn’t even tell which currency pair was involved.

The instructor then asked the audience to tell him which chart was a 5-minute chart, which one was a 15-minute chart, which one was a 1-hour, and which one was a 1-day chart. To our amazement, we couldn’t do it. They all looked similar. Within each channel, the price fluctuations looked almost random; but, overall, each channel had a direction.

This feature of price movements is oftened referred to as the fractal nature of prices. Not to get too deeply into the mathematics of fractal geometry, basically a fractal looks the same at all degrees of magnification. And this is exactly what the demonstration (above) proved to us. Without a numerical price scale or a time scale to judge by, you can’t tell a 5-minute chart from a daily chart. The only difference between them is the size of the fluctuations.

Want to play? See if you can identify the time frames here. These charts are the same currency pair, all captured simultaneously. They are 5-min, 15-min, 1-hr, and 1-day (not necessarily in that order). Can you sort them out?

1271×861

Looks like Phil and I had the same idea.

He posts neater charts than I do.

And I used up all my Wite-Out!

Clint

13

[B]Damn! Those are ugly charts! I apologize for that.[/B]

14

Wow.

Clint, I have no idea where to begin! :eek:

With that said, both you and Phil: thanks a lot for taking the time to screenie and post the chars (or puling them up from whatever archives you may have - it is appreciated).

I can very clearly see that the same trend patterns play out in larger TFs, except that, as you have pointed out, they’re less prone to noise and false positives.

My concern at this point is as follows - was I wrong in conceiving of FOREX as an environment where I would be trading once every several hours at the very least?

The reason being, it would literally take days for a clear trend to emerge on a 4H-1D-1W chart - and even longer for it to reach the TP level after my entry order has been filled.

If that is true, then I would be placing a single entry order once a day at best - if that.

I don’t lack patience and neither was I expect instant riches overnight - but it seems that I expected FOREX to require faster reactions to changes on the market. Was I wrong?

15

to George, of course you can trade the 5min chart, with all those juicy zigzags. BUT, nobody recommend that to a new trader because the emotional strain and competition from well-capitalized institutional traders is Fierce. Remember that you are at a disadvantage as a retail trader, your spreads are likely 1-4 pips wider than the spreads they are seeing and the order execution will likely be slower too.

They can run systems that are very profitable from their vantage point, while you could trade it and end up taking losses just because of your wider spreads. And I wouldn’t buy that bull about small time frames being “noise”. Every price movement is created by someone buying or selling, and there is intent behind all those decisions. It only seems like noise because the person buying and selling might only be targeting a few pips, and is in and out of the market in seconds.

16

It’s certainly possible to trade 5M or 15M charts, my original point was just that using them as practice for trading higher timeframes was a bad idea.

Also, new traders often get “information overload” from faster charts, it’s a much better idea to trade higher TF’s first and work your way down.

And there is nothing wrong with placing one order a day, or even less. I only take 2-3 trades per week most weeks, even though I stare at forex charts all day long. :slight_smile:

Picking the best trades out of the bunch and trading 2-3 per week is just as profitable, and less time consuming, than getting 10 mediocre trades per week.

17

Phil,

Thanks a lot for clearing this one up - I guess I just find the whole process of trading multiple times per day on 5M - 15M TFs way too engaging. Somehow, there’s just a bit more excitement to it than waiting for a day for a trend to solidify (although, once again, this just might be newbie thinking!)

Thanks a lot, all of you - this has got to be not only the most helpful community I’ve ever met, but, more importantly, one where members actually share solid, applicable advice.

Without naming names, one of the forums I used to be a member of was full of people who would give you “airy”, inspirational advice, quote “Think and Grow Rich” and stress the importance of persistence and the power of negative thinking - in short, they’ll give you everything BUT the practical advice you actually need to make things work.

So thanks folks - I really hope to stick around!

18

What you’re asking about is called “trading style”. It distinguishes scalpers from position traders, and all the gradations in between.

Generally, a scalper is glued to the computer screen, has no time for entry (pending) orders, TP’s, or SL’s. A scalper sees a pattern, or a price movement, that he likes, and enters on a Market Order. Then he sits tight, finger on the mouse button, ready to exit manually, as soon as his instinct tells him that momentum is dying. He’s looking to make the spread plus (maybe) 5 pips on each trade. Scalping has sometimes been referred to as “Forex Whac-A-Mole” (if you’re familiar with that arcade game).

A position trader, at the opposite end of the spectrum, is trading the longest trends, and his trades can last for weeks or months (and, in rare instances, even years). As you can probably guess, the exact times and prices of entries and exits are much less critical to the position trader, as compared to the scalper. Also, whereas the scalper is looking at minute-by-minute price action, the position trader is basing his trading on fundamentals as much as, or more than, technicals.

The scalper is risking a few pips in hopes of earning a few pips of profit, and he might do this [I]100 times per day[/I]. The position trader is risking hundreds of pips for the opportunity to earn hundreds or thousands of pips on each trade, and he might trade [I]several times per year[/I]. Deep pockets, a keen awareness of economics and current events, and the ability to screen out the “noise” of short-term price fluctuations are all essential for position trading.

In between these extremes, there are active traders, day-traders, swing traders, long-term swing traders, and as many other trading styles as you care to define. The basic differences among them are: time-frames traded, time-duration of a typical trade, time (and intensity) in front of the computer, typical profit target and stop loss, analysis methods (purely technical, technical + fundamental, or purely fundamental), and risk aversion vs. risk tolerance.

One of the things you will discover, as you explore forex, is where you are most comfortable in this spectrum. This is one of the most subjective features of trading — it depends on your personality and your temperament.

Your previous post seems to indicate that you prefer a fast-paced, hands-on sort of trading. If this is the case, then you will probably end up somewhere around the scalping/day-trading end of the style spectrum.

But, don’t force yourself into a style. Let it find you. You’ll know when things feel right.

Clint

19

I agree with you. I just call it noise because that’s the term everyone uses.

Every chart tick is relevant! When I say the lower TFs are “noisy” I just mean the moves are more sudden and trends and patterns are less defined.

For example… In Clint’s charts I can tell (I think) that the upper right chart is a daily chart. It has a perfectly parallel channel over a large number of candles.

The lower right chart is (again, I think) the 5M chart. It has the same number of candles as the daily chart, and I can definitely pick out a clear trendline, but it’s not as “smooth” as the daily chart.

20

Alright, I’ll propose a middle ground for our friend.

Learn to trade on a larger timeframe, this will give you great lessons in patience and money management. But if you ever find yourself parched for forex knowledge, open a 1m or 5m chart and just observe the patterns created throughout the day. And if you want a live show, watch the 1m or a tick chart and you will start to feel the emotions that the market is feeling and you will understand why traders make the decisions you see in the patterns. This is assuming you have the self-control not to trade what you see! :eek: