Money Management is the "HOLY GRAIL"

Trading Systems
1

Hello all,

I would like to post my trades here as I trade live with zecco forex. I want to hear from you also and your opinions on my trades. I trade mainly Daily charts and 4 Hour charts. I look at the Weekly chart, Daily chart and the 4 Hour chart and plot FIBs and thats how I decide on a trade. I also look at RSI 14 to confirm a signal and the popular price action set ups such as pin bars and such. I have tried short term trading and have not been successful at it, I think the only way to profit is through long term charts. However, what distinguishes a profitable trader from others is MONEY MANAGEMENT. The most important thing that makes you money is not indicators or systems or any other secret but it is the following 4 things:

  1. MONEY MANAGEMENT
  2. MONEY MANAGEMENT
  3. MONEY MANAGEMENT
  4. POSITION SIZING

There are no secret systems or smart systems out there. If you look at all the systems out there that use 100s of indicators with fancy names, they all do the same thing but with a different name and approach. If you know where the support and resistance lines are on a chart, then you have an edge in the market and that is pretty much all you need to trade. I just look at resistance and support lines on 4 Hr, Daily and weekly charts and decide to trade or not. I check the news also just to be aware of such things as the European crisis right now which is the reason I am avoiding trading the Euro for now because it is so much news driven because of the credit crisis there.

Money management is the key, last month I traded 10 times and 5 of my trades were profitable and I made some money. So last month I was right 50% of the time. For now I use a SL of $500 on every trade and a TP of $1000. That is a 2:1 RR ratio. So here the money management plays a big role, I base my stop losses on dollar value rather than pips. I feel comfortable losing $500 and not get emotional.

So now that I want to make $1000 on every trade and comfortable losing $500, I have to use position sizing to size my positions accordingly for any trading pair or set up. No matter what pair I trade or how many pips I am trading, I adjust the SL to $500 and TP to $1000. For example, if the SL is 100 pips and TP is 200 pips, then I will be trading 5 mini lots for that trade. If the SL is 500 pips and TP is 1000 pips, then I will be trading 1 mini lot for that trade. Now you can see that no matter what kind of trade it is I position the size according to my own dollar value. So I figure out the SL and TP by analysing the chart and support and resistance. After I figure out how many pips against me will invalidate my signal and how many pips in my favor will be my take profit then I will adjust the position sizing to lose $500 and make $1000.

I don’t trade everyday, I wait for good setups that are high probabilities because if I can get one good trade a month I am happy with that. It is better to trade high probability set ups 5 times a month than doing 20 short term trading.

Again consistancy is the key to making money, you SL and TP must be consistant so that the math works for you. If you SL and TP are not consistant in dollar value then your R/R ratios will not work. That is why I do not recommend using the 2% rule because it kills your R/R ratio math.

Example using the 2% rule based on 2:1 R/R and recalculating the 2% with the current account value:

Account value $10000

Trade 1 -$200 Account value $9800
Trade 2 $-196 Account value $9604
Trade 3 $384 Account value $9988
Trade 4 $399 Account value $10387
Trade 5 $-207 Account value $10180

Example using the 2% rule based on 2:1 R/R and staying consistant with the 2% of the original Account value $10000

Trade 1 -$200 Account value $9800
Trade 2 $-200 Account value $9600
Trade 3 $400 Account value $10000
Trade 4 $400 Account value $10400
Trade 5 $-200 Account value $10200

As you can see if you change the value of the 2% then your R/R math with not really work because when you lose, you have to trade smaller and it will take more wins to cover the previous losses. The whole idea behind R/R ratio is that for example 1 win is going to cover 2 losses. But when you trade smaller after losses, that math is not working for you anymore. So stay consistant with the SL and TP dollar values and change your lot size according to your pips.

I also don’t believe in account growth, I withdraw profits when I have wins. I am trading with $5000 dollars and when I am over $5000 dollars at the end of the month, I reward myself and withdraw it. This way I get encouraged and also I make sure I won’t lose that money that I just made so I take it out and trade with the same $5000 dollars I had invested before. The idea behind leaving all your money in the account and growing it makes you greedy and you will lose your wins one day. I reward myself as I win and stay consistant with SL and TP.

As you can see I take MONEY MANAGEMENT and position sizing very seriously and it is more important for me that the system or trading method. Most trading methods are profitable if you are good in money management and position sizing. And lastly you need a good capital to start trading because with small accounts, the small profits will not satisfy you and that will make you take big risks and when you lose, you get emotional. To win a descent amount of money, you need a descent amount of capital to trade and take bigger losses too that you will be comfortable with. Ok I am tired of writing I would like to hear from you also. Happy tipping :35:

2 Likes
2

I’m confused.

$500 is not 2% of $5,000. How do you manage that?

As for leaving the money in the account, I disagree.
It doesn’t make you any more greedy, and to properly compound an account, it takes a lot of patience, and good money management.

Nothing wrong with turning a little into a lot. I for one am viewing this as a long term strategy, and not an overnight “get rich quick” panacea.

A few pennies in the jar every day makes for quite a nice nest egg over time.

3

Well I have $5000 in the account but I do have more money in my personal bank account and I don’t use the 2% rule, I base my SL on what I am comfortable losing. I don’t get emotional when losing $500 so that is my SL. I just use $5000 because it doesn’t make sense to put $50000 in a forex trading account when I just need $5000 to trade because I can use leverage. The 2% is a popular rule and I used that in the examples I gave, it doesn’t mean I use that rule. I was not referring to the 2% but rather not changing the dollar value amount everytime you lose or win. I think one has to use a stop loss that he/she is comfortable with and not change it when the original account value changes.

Good luck and long term strategy is good but I like to take out my profits when I win. Thats just me.

4

If you had 50,000 in your forex account you can trade with leverage and bigger sizes, Unless your 50,000 is your “Fall back” money and not your investment money I don’t see the point in not trading it.

Example: 10% monthly return is much nicer when you reinvest your earnings from last month.

5

Did I read anywhere holy grail? LOL! :smiley:

Okay, here are my 2 pips. MM is in no way unimportant. It’s in fact more with it than just increasing or decreasing leverage. Dozens of books have been, and probably will be written about it.

Anyways, without proper edge your mm becomes a tool to prolongate trading your account til being busted, not stopping the inevitable.

Some of the mm methods to consider are fixed fractional and fixed ratio. Plus google for kelly formula. Dependent on your personal risk appetite you may mix all of those to get a mm method what suits. :slight_smile:

6

I don’t want to trade bigger sizes, I am only comfortable with a $500 stop loss and I can accomplish that with $5000. It also prevents me from overtrading because I might overtrade when confident if I have $50000 in the account. I don’t want to reinvest really I am not in this game forever, I want to enjoy the money I have earned. I don’t want to keep it in the account forever and lose it again. When you reinvest your profits and trade bigger and bigger you might lose it all one day because the market does not have mercy and unpredictable and who knows I might get greedy and lose all of it but I want to take out the profits asap and just keep $5000 in the account.

7

I do have an edge, I trade the longer time frames with price action and trendlines. I don’t like kelly formula and I don’t like any mm methods that changes risk exposure with account size.

8

Thanks PipTown because your happy tipping. It’s a good management tactics. I will learn and try. Thanks u :smiley:

9

I respectfully disagree that MM alone is the “HOLY GRAIL”.

Here are my thoughts:

  1. First and foremost, your stop loss should be based on concrete support/resistance and/or whatever indicator you have tested that when pierced makes the trade invalid. SL should not be based on dollar value.
  2. You must have a profitable system. What good does your MM do if your system doesn’t work?
  3. You must have the discipline to close a lossing trade when it hits the SL and take the profit when it reached it pre-determined TP point. I would emphasize the word DISCIPLINE.
  4. You must have the patience to you let your winners run until it reached the TP. Most traders I know will take a profit 50 pips away from heir original tTP because they’re afraid that the price will reverse, only to see the price reached the original TP.

For MM matters, newbie traders should make it a habit to risk a fixed percentage relative to their total trading capital. This way, when you are trading bigger lots, emotions doesn’t come into play because what you’re risking is the same percentage relative to your total account.

Happy Holiday!!!

11

Lack of MM is not what ruins a good system. MM IS part of a system and if the MM side of a system is not good then the plan is not good.

What ruins a good plan or system is the trader.

MM is nothing without probability. If you consider the prob of the market to move one pip up or down, to be 50%, then with a 2 pip spread, you have about 33% chance of breaking even. If your stop loss is 5 pips away, thats like 42% chance to win with 1:1 ratio (TP 7). If you can have 50:50 accuracy picking price direction, you will lose 8% of your money.

Consider the 2:1 profit ratio. If your SL is at 5, your TP will need to be at 12 with 2 pip spread. The prob of winning is 30% in a perfect world. If you can pick price direction 50% of the time, then you will lose 15% of your account. Worse odds than with 1:1 risk to reward. You will have to have about 34% win rate. With 30/70 odds, you will need well above 50% point-of-entry accuracy.

Enter analysis! One must account for standard deviation, range, trade duration, etc; to enter a trade as close to their SL as they can. Your RtR ratio needs to come AFTER you find a higher prob trade. If you trade a formation at a PP or OB/OS, with TP within standard deviation, then you can have a SL outside the pattern instead of an arbitrary ratio. If it ends up being larger than 2% risk and outside of your RtR ratio, then trade is no good.

To say that MM is the holy grail is putting the Cart before the horse.

If anyone fails, it is due to their inability to control their emotions.

(typed on phone. Sorry for any errors.)

12

Very nice post, I wholeheartedly agree, especially with Items 1 and 3.

O.

13

That calculation is based on what I like to call ‘casino odds’, i.e. you just enter a trade blindly. You must have valid rules to enter a trade, of course, which means that the winning probability on a Risk:Reward Ratio of 1:2 is way higher than the ‘purely mathematical’ 33.3333333% you’d achieve with a ‘blind entry’.

And if you pick correct price direction 50% of the time, employing a Risk:Reward of 1:2, you will not lose 15% of your account (lolwut), but you’ll make money.
Example: 10 trades (of same size, of course), S/L 10, T/P 20; 5 losers, 5 winners = 50 lost, 100 won = 50 profit.

This is why picking a ‘positive’ R:R Ratio is as important as proper Money Management.
The only exception to this rule is scalping, which should be done by professionals only (I mean ‘real scalping’, not holding a position for 15 minutes and calling that ‘scalping’).

Cheers,
O.

14

I really like this topic and I’d like to highlight a way that I utilize money management in one of my styles of trading.

I will use one of my trades last year as an example.

I’m sure everyone remembers the head and shoulders pattern that EURUSD formed at the end of October, right?
Well during the formation of the right shoulder, I had already anticipated (through wave count and other factors) that the price would break on the low side. I plotted a channel on the chart that was forming on the right shoulder.
One way to trade this would have been to trade the breakout to the downside of this channel, which wuld also be a breakout of the head and shoulders pattern and usually a pretty high probabililty trade to make, but i waited for the price to retrace back to the top of the channel (gold line on the chart with red arrow pointing down), and sold there (more of a reversal style) 1.3841 and doing so allowed me to use a much tighter stop loss (red line - 1.3885 - based on previous highs in the channel) - and a much larger position size while maintaining a 5% total risk between to positions.

rr trade.jpg700×233 20.7 KB

I made the decision to close both positions at 1.3442 for a gain of 41%. I could have traded the breakout instead and had a stop loss of 220 pips, while maintaining 5% risk my position would ave been about 4 times smaller and i would have gained only roughly 10%.

15

I agree with you almost completely PipTown, but personally I do not change my lot size within a month as I make sure that the lot size I use in my account is able to accommodate 20 consecutive losses. I also don’t wait till the end of the month to take profit, I take it almost instantly as long as i am profitable in a week. I have been beaten so many times trying to build up my account. So whenever I have more spare cash, I add it to my account and increase my lot size accordingly.

17

I agree with you … money management it’s very important…

18

I’m newbie, thanks for share Money Management tips, I think that’s very important factor in trading

19

i agree with the OP - good thread, there are a lot of average strategies being traded well by traders with great money m’ment skills/techniques. And no doubt there are some v good strategies which will never be traded well by 99% of newbies cos they have no MM skills.

20

Regardless of if one keeps the earnings in the same account or if it invests by percentage, for example no more than 2% loss of the account value in one trade, or simply has a fix amount say 500$ in this example, I have the following question.

Say the account is 10 000 and the max amount one plans to lose in one thread is 2%.
For simplicity let’s assume the traded pair is EURUSD and the pip value is 1$.
Setting the S/L accordingly, let’s also assume that the appropriate value for the S/L is 100pips and therefore the lot size will be 10 000.
If the user loses the trade, the loss will be 200$.

The idea is to have a good lose/win ratio, and in time, regardless of the percentage or fix amount method of investment used, to win more trades that those that lose.
With the percentage method, the winners will bring the account up less than with the fix one.
With the fix one the losses will accumulate faster.
This is clear.

But the question is, how many trades is the trader willing to lose, in order to decide that the method of trading is not correct?
Say if 30% of the initial account is lost, then the trader might have decided, enough! My trading system does not work. So he will stop, and trade later with another strategy or simply stop trading.

Then, the question is, why would the trader keep 10 000 in the brocker account?
Especially that those money are at risk. If the broker goes down.
Even Dukascopy, that is a Swiss bank, has not a clear statement of how are your money in the account safer. On one hand they said they are a bank, and your account is safe, but their site states that unless your account is at least 100 000, you can not have what they call Bank Guarantees, but they never explain on their site what that means.

So the question is, if one plans to lose no more than 2% in one trade, which means that the biggest loss could be at the beginning of the 10 000$ account size - 200$ and then the size will shrink accordingly, and also that the plan is to stop at a balance of 7000$, then why not just keeping say 3 200 in the broker account, and keep the rest of 6 800 save in your own bank account. Since the broker does not allow you anyway to have a separate account if your account is not more than 100 000.

It would be the same thing.
And if one decides to continue, even after getting to a size of the account of 7 000, it can always transfer more money into the broker account, out of the personal account containing the 6 800$.
In other words, one decides from the beginning that the money risked in the forex trading will be 10 000$ but does not put more than a third of it in the broker account.

In all articles about money management, I never understood why would one want to put 10 000$ in the brokerage account while planning that he does not want to lose more than 30% of it.

21

  1. that’s the point, blind entries won’t cut it. MM is not the holy grail because it a negative sum game.

  2. lets put on our thinking caps here. If you pick the right direction of price movement, you must also be correct on distance of that movement. If you have 1:2 RR, then the price has greater odds of moving the distance of your stop than your TP. This is according to a blind bet. So, all things equal, perfect MM ALONE will still keep you in the red.
    This must be considered in the context of the conversation: MM as the holy grail.
    It is not.

  3. future reference, numbers don’t lie. (Greece, auto makers in 2008, Enron, 95% of people who try FX, fanny and Freddie, etc.) someone can ignore simple math, but if the numbers don’t line up, they will lose.

Good luck.

22

I’ll give you several reasons why you would want to keep the full balance in your account, not just the %30 you’re willing to lose:

  1. If you just put the $3,000 in the account, and you show a profit of $3000 using risk management based on your hypothetical (10k) starting account, I guarantee almost all newb traders would then start using double the lot sizes because they’re actual account had doubled, when in reality your lot size should go up only 30% based on your “hypothetical” account size which is now worth $13,000 and you’d be trading as if it were worth $20,000.

  2. If you only deposit 3k, you’re maximum margin is 3k. It is possible however to scale into trades keeping your initial risk the same but eventually leveraging your entire account to maximize gains. You can’t do that if you’re entire balance is only big enough to trade a few risk units.

Here’s an example. Say you have 3k in the account and you want to risk 2% of your hypothetical 10k account size, so you set up a trade from suppport of eur/usd going long with a stop loss of 25 pips. How many lots do you trade? 2% of 10k is $200. $200 is 1 risk unit for you. $200/ 25 pips / $1 per pip for mini lots = 8 Mini Lots. The required margin on this position is going to be over $2400 for an NFA certified broker, so you only have enough margin in the account to trade 1 risk unit. If you had $10k in the account, you could afford the margin on 4 risk units. Why does this matter you ask?

Let’s say the trade moves 25 pips in your favor (you now have a profit of 1 risk unit) and your higher time frame analysis leads you to believe this trend is likely to continue until it hits a major resistance 100 pips from your initial entry.

In scenario A (3k account):

you can only ride out the trade for the duration, you take the profit at your 100 pip target. You have earned 4 risk units (100 pips/ 25 pips per risk unit) 1 risk unit = 2% of your hypothetical account so you have a total gain of 8% or $800 (remember your hypothetical account is worth 10k to start, not your 3k balance)

Scenario B (10k account)

Your risk unit for this trade is the same, 80 mini lots for for a total risk of 2%, but now once the the price has moved 25 pips (for a gain of 1 risk unit) you decide to add to your trade a second risk unit. Won’t this increase your overall trade risk to 4% you ask? Not if you move your net stop loss up 25 pips as well. Now if the trade moves against you, your initial trade will break even and your second trade will lose 25 pips for a total risk of 1 risk unit.

Now the price moves another 25 in your favor, a total of 50 (half way to your target 100 pip gain) How many risk units are you up on the trade? You gained 1 risk unit on the first 25 pip move, and 2 RU’s on the second for a total gain of 3 RU. We’re not halfway done yet and option B has gained nearly as much as option A.

Now at 50 pips you want to scale in again while keeping your risk to 1 RU. If we move our stop loss 25 pips again, how many RU can we trade? We can double down again and purchase 160 more min lots while holding our risk to 1 RU. Now if we are stopped out, we gain 1 RU on the initial trade, breakeven on the second trade and lose 2 RU on the third for a total net of -1RU.

We’ve now used over 90% of our initial margin while keeping risk to the same 2% from the start of the trade. Let’s ride out the trade and see what happens.

We close all positions at our 100 pip target.
On trade #1 we gain 4 RU (Initial trade size 1 RU * 100 pips gain/ 25 pips per RU)
On Trade #2 we gain 3 RU (Trade size 1 RU * 75 pips gain/ 25 pips per RU)
On Trade #3 we gain 4 RU (Trade size 2 RU * 50 pip gain / 25 pips per RU)

Total profit on the trade is 11 RU or 22%, nearly triple the return of scenario A.

This is the real secret to how pros make money in forex. Pyramiding positions without increasing risk, couple with favorable Risk/Reward ratio’s on trades. Good traders with confidence in their systems and their abilities will always want maximum capital in their account. The reason Newbs or other traders without respect for risk management would want to only keep “the 30%” their willing to risk in the account instead of the full balance is because they know sooner or later all discipline would break down and they’d start opening trades using their maximum margin to chase their latest loss.

When I started trading forex I had a good grasp of S&R levels and a decent grasp of technical analysis, but was enough for me to make money trading stocks, I was getting killed in forex. Why? The increased leverage. When you’re trading stocks at 1:1 or 2:1 margin, you need only the barest MM if you’re directional forecast is correct because the short term adverse price movements will have so little affect on your account balance. At 30:1 or 50:1 margin in forex, 100% of traders that do not develop a solid Money Management system will fail. They say 95% of forex traders fail, I’d say that 93% of that was from poor risk management, and over trading. Once I laid out a system for risk management in my trading, I went from a thrashing noob to a consistent, winning trader almost literally overnight. Make the commitment, and improve your trading dramatically. GL