Hi,
just my opinion but you shouldn’t risk more than cca 5% of your account. Much safer is risk about 2-3%. If you risk 1-1,5% still OK. But risk 10% is big mistake. Well if you know that you win next 14 trades then you should risk 100% of your account but you never know. Problem is this: you have 100$ and risk 10% each trade you lost 4 trades in row (I think that it is nothing unusual) now you have 65$ … you [B]lost 35%[/B] of your account. Now you have 65$ and if you want go back to 100$ you need grow your account by [B]53%[/B]. For me first rule of trading is protect your capital. You never know what can happen. Risk your account only because you belive that you cant loss 5-6 trades in row is big mistake. Just my opinion.
But what does it change, really…it’s just a proportion. Okay lets take two examples: A - risk 10$ per trade, B - risk 3$ per trade, balance - 100$. After 4 losing trades you have A - 60$, B - 88$. To win it back you have to win 4 trades in a row considering that you are not risking more than A - 10$, B - 3$ per trade of your balance and RR is at least 1:1. In both scenarios you would again have 100$ after 4 winning trades in a row, but when it comes to profit making, then you can boost your account 3x times faster using example A than when you use example B.
There is just this one thing and which I’m trying to somehow solve - to increase RR, because as previously said, a lot of times we take our profits at the first S/R level, where price may struggle or reverse, then move to breakeven to protect capital (just in case), but then price reverses and we are out at BE, so we end up having 0,5:1 or less RR.
Yes that is true but you look at it that you want increase your accout faster but dont look at it that you can lost everything much faster. If you want trade you probably want to trade with money which can change your life (maybe not now but in future yes). In that case you must firstly protect your money.
I have taken that into account and I’m well aware of that, but the thing is as I asked previously - how often do you get 10 losses in a row? Even now, when I did back-testing on EUR/USD D1, I didn’t have any loss from 14 executed trades.
Perhaps I haven’t read enough MM Books, if so, then please someone give me compelling example, why should a trader risk only 2-3% per trade of his/her balance and suggest a good Money Management book, please.
Hey eternal, that did slip past me, I will look over it a little more in depth and see how practical it is. I think it’s important to have multiple templates for creating a trading plan. Everyone visualizes things differently so one may like a textual list and another a graphic flow chart.
BTW in programming we use graphical flow charts to pre-plan the logic of our programs, so they can be useful in all kinds of applications.
Thanks for bringing it up.
Try to read some books about MM. I belive people like Soros, Buffett, Williams … and all of them say that you must protect your capital. Forex dont remember what happend in past. With your phylosophy if you have 50$ you risk still 10$ cause it is not probable that you lost 6 trades in row. In my eyes you risk 20% of your capital in 1 trade. It is nothing for me and I think that it will be nothing for you if you will trade with money which mean something for you.
The pinbar requirement of closing within the body of the previous candle is not a universal rule, it is just taught by certain people. There are other pinbars that don’t close within the previous candle, but quality as “proxy pinbars”. These are a bit more advanced and I probably won’t be hitting on them for a while, but I did want to make the point not everyone teaches a close within the previous candle as a pinbar. Although the best quality ones do close as such
Oh yeah, it does remember, how about S/R levels you draw? You draw them using price history. And I’ve never said that I or other traders shouldn’t protect the capital - it’s actually rule number one in order to stay in the business.
I want to say that forex dont remember if you lost last 50 trades or win last 80 trades. I want to say that next trades is new episode and doesn’t matter how successful were last trades. You cannot think that if you lost 5 trades that it is more probable that next trade will be successful because you lost 5 times in past but you want risk 20% of your account in this trade??? I don’t talk about S/R lines but about MM. Well if rule number one is protect your capital then I don’t understant why you want rist 10% it is the true opposite 
[B]Fixed % Vs. Fixed $[/B]
I see money management has become a big topic here. I want to point out the mathematics behind each method, why they are different and why they are both ok to use.
[B]Fixed %[/B]
[B]Speed to recover losses = slow[/B]
The reason using a fixed % model makes it harder to recover losses is because as you lose, your positions decrease in size making your winners smaller and smaller. This can make recovering from a large drawdown quite slow.
[B]Risk of blowing account = low[/B]
The same principle behind fixed % that slows recovery also keep your account from blowing out quickly. Technically if you stick to the fixed % model you can never blow your account. Also if you have a long string of losers(which does happen), your losers will dent your account less and less(in $'s) with each successive loss, essentially minimizing the impact of the losses compared to fixed %.
[B]Account increase speed = fast[/B]
The reason your account will increase much quicker in a fixed % model is because you are compounding your winnings. If you have a big winner and it increases your account size 10%. Your next trade will not only be risking your original amount before the win, but also a fraction of the 10% of your last winner. Essentially you are risking more money with each successive win.
[B]Fixed $[/B]
[B]Speed to recover losses = fast[/B]
You will recover losses much quicker in a fixed $ amount. Since your amount risked each trade is fixed, your ability to recover is directly tied to the risk/reward of each trade. For example if you always trade 100$ per trade, and you have a 1:10 RR win, this means your winner will wipe out 10 losers. The quick speed of loss recovery is what makes fixed $ so attractive. Also as you lose, each fixed $ amount risked becomes a higher % of your total account size.
[B]Risk of blowing account = high[/B]
The same principle behind fixed $ that speeds up your loss recovery greatly increases the chances of blowing your account. This is because with each successive loss, your account shrinks that amount. With each loss, your next trade is a greater % risk of your overall account size. So instead of your risk % always remaining the same in a fixed % model, your % risk is always increasing with every loss. It is this increase in % risk that helps you recover your losses so quickly, and increases the chances and speed of blowing up your account.
[B]Account increase speed = slow[/B]
Your account will grow at a much slower rate than a fixed % amount. This is because with each successive winner, each trade you take is a smaller % of your total account size. It is the compounding effect of a fixed % model that causes accounts to grow so quickly. In a fixed $ amount, you are not adding that money into your next trade, and essentially avoiding the principle of compound profits.
I personally used a fixed % model in my trading. While my overall trading win % may hover between 50-70%, I may one month have a string of 10 wins, and the next month have a string of 5-10 losers. In a fixed $ model, my 10 wins did not compound and thus did not produce the same growth that a % risk would have. And in a fixed $ model my losses affected my account to a much greater %, causing a great overall loss in $'s.
I want to make a quick note on these guys who teach that fixed $ has nothing to do with account % risk. I read an article from a very well know PA teacher who essentially tried to argue against math. I found it both humorous because of the flawed logic, and disappointing that so many people follow this types of flawed logic, and it ruins their trading careers. It also goes to show that many of these teachers believe so highly of themselves that they feel they can invent new math. But that aside, whether you use a fixed $ or a fixed % model, you are always risking a certain % of your account each trade. As you saw above, the fixed $ model essentially increases your % risk with each loss.
These teachers say $'s are all that matters because I may not have all my money in my account, so if my broker account has 50,000 and I risk 25,000 on a trade, I may have millions elsewhere not in my broker account. I’m not sure what kind of argument this is because at the end of the day every trader has a total account size that they can trade with. Maybe your broker account has $50,000 and your savings has another $950,000, but at the end of they day you still have a total account size of $1,000,000, which means in your fixed $ model, your $25,000 per trade is still a 2.5% risk. I have also seen the argument from these same teachers that say % risk doesn’t matter, just trade what $ amount you are comfortable with. WHAT?!? You have to be kidding me! If I have $10,000, what if I am comfortable with risking $5,000. This would be an absolutely absurd 50% risk that no one should ever take on a single trade and completely irresponsible as a trader. But the way the fixed $ teachers make it sound is that percentages don’t exist, only a $ amount. No matter how many ways you want to argue it, at the end of the day every trade you take will be a certain % of your total account size. Choosing a fixed % or fixed $ just determines if your % risk per trade scales up with your winners or scales up with your losers. It really is as simple as that.
I would say a fixed % is the best for beginners, because your win rate % may be very volatile as you are learning. You may still be learning what are high quality trades, or may deviate from your trading plan as you are trying to become disciplined, and this will cause you a string of losers. The % risk keeps you afloat as you re-evaluate why you are losing so much. The fixed $ should be for those with a fairly consistent win rate, and for those who know about how much their yearly risk/reward is. You should know on average about how much larger your winners are over your losers. You can then use that information to find the best fixed $. You only set your fixed $ based on a practical % of your account. If you have a $10,000 account, you may decide to start your fixed $ amount at 5% of your account size, or $500. What you do is you stick with 500$ per trade risk until your account doubles. Once your account doubles you then double your fixed $(so $500 become $1,000). That way your fixed $ amount risked is always a practical % of your overall account.
I personally use a fixed %. I have a certain percent of my account that I will never risk over, and depending on the timeframe of the trade and the quality of the setup I will risk any % as long as it never exceeds my max allowed % risk.
[B]Note:[/B] Protecting your capital is always # 1, in both trade management and money management. I think beginners should use a fixed % and keep their risk at 1% or less. This will keep their account from crashing hard if they hit a string of losers and also keeps them focused on how to trade better and not about making money, while still being rewarded for winning. After they have traded enough they can begin to gauge how successful they are in trading. If they know they are beginning to trade successfully and make a consistent profit, they can begin focusing more on increasing their account size by risking more %. I personally wouldn’t risk more than 5% of my account, because it would be mathematically unwise to go any higher. And I would only do this if I knew my setup had a very high chance of success based on “previous trade history and experience”.
Anyways, I still haven’t received any compelling example. I’m going to wait what Krugman has to say about this.
Krugman :35:
Awesome:
Great knowledgeable articals from you
No doubt everyone loves u and i`m one of them.
Hello guys.
It’s another appreciate teaching.
I join with the kind message from Saeed.
Thanks Krugman.
I don’t know which the best MM is, but I think that trading with a high level of risk (10%) have a big impact both to the balance of the account and to the correct level of emotion. If I have 5,000 euro (real money), I won’t risk 500 euro per trade because it makes me uncomfortable.
If Richard’s method is based on 10% per trade and he’s comfortable and aware about it, for me it could be as profitable as with lower % of risk.
Cheers.
Claudio
Hi FaRs:
Amazing back testing results,
Ok, first orders placed according to plan on EURCAD Daily BEEB
The pair is in a range (1.4068-1.3702) and a BEEB occured at the top of it.
Entry 10 pips below PA Signal: 1.4001
SL 10 pips above PA Signal: 1.4123
TP1 10 pips above first support: 1.3908
TP2 10 pips above range low: 1.3712
EMA21 is on the way but far enough to consider entering the trade. Will monitor how price reacts to it and move the whole trade to BE if failure to break through it. Also, I will monitor price reaction to 1.3787 and I will take profit manually on the second trade if failure to break through.
Risk is 2% on each trade so 4% all together
Thanks Aaron,
If you ever find the time please do review my updated one on 301 Moved Permanently
I think it is starting to take shape and would like your input on it
Bambino my point is exactly that you don’t NEED to get back to 100
If I have 10.000 usd in my trading account and this is all the spare money I have and I can’t afford to put another dime in my trading account then risking 2% (or 200 usd) is a huge risk for me because a lost would mean a 2% loss of my CAPITAL or all the money I have in the world
But if I own 100.000 usd and pay 200 usd for a dinner in a fancy restaurant but just have in my trading account 300 usd then risking 200 usd on any trade and losing them means nothing since I can just use my credit card and refund the lost 200 usd
again my 2 cents
Was filling my trading plan for the first time before entering the AUDUSD trade and I edited it a bit here is the new version
https://dl.dropboxusercontent.com/u/10302917/Forums/Trading%20Plan%20v1.1.docx
Mind showing your entry chart and entry signal?