Rethinking Money management systems

Hi all, There is a system of trading which appears to be guaranteed to make money - so long as you follow the rules. It has been around for a long while and came from a bet between two professionals - as to whether you coud take a slack handful of people off the street and turn them into profitable traders.

That system is known as “Turtle trading” - yet it is hardly ever adopted by anyone. WHY ?

Well it is a trend following system and one of it’s properties is that hardly any bets are successful !

I believe a figure of 9 losers out of ten bets is the generally accepted proportion !

Yet the money management rules make it profitable in the long run !

A variant is traded successfully by one of our members, I believe.

Money management relies on pyramiding in to the trade and moving stop-losses forward at specific intervals, to lock in profits, although eventually the position is closed for what may be regarded as a “huge loss”, although in overall terms, the bigger the final “Loser” the bigger the profits previously “locked in”.

The mental trick lies, it would seem in refusal to “Take ownership” of unrealised profits. “The money is not yours until it is cashed” being the principle.

Our own protagonist (who will reveal himself if he so wishes) states that the only time he voluntarily closes a bet, is if he has ne more “Margin” left in his account and needs some to pyramid in again !

Now clearly, this is in striict contravention of the oft hackneyed “1%-2% rule”, yet it is both incredibly profitabl on thise few winners and at the same time “completely safe” - (Provided those odd " Winners" continue to turn up ! )

The fact is that the system is a kind of “Martingale in reverse” type system !

SO all morning, I have been wondering whether those same money management priciples can be applied to “ordinary trading”, where winners are more frequent, or whether it is inherent in the “Trend following” part of the system that some property exists which could not be transferred to other methods of entry and exit.

What say we ?

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It doesn’t have to be, if you always adjust the SL before further re-entries: you can do it limiting your total loss at any one time to whatever you want.

In the Jack Schwager books, Market Wizards and New Market Wizards, there are interviews with several of the origianl turtles who explain (among other things) why it no longer works.

It’s a shame Lukas has deserted us, because he used to trade one of those Donchian channel methods at the French institutions where he was a floor trader in the 1990’s, and could tell you more about it than I can.

I think the advent of HFT’s have made it pretty much impracticable, these days, for retail forex traders, anyway.

The “pyramiding in” part still works, though, regarding money management. I do something similar myself. But with stop-loss adjustments in such a way that total risk exposure is never more than whatever you’ve specified (way less than 1%, for me).

Yep now that’s the part I’m finding interesting here - The money management of teh individual trade.

Let’s use 100 pips for the sake of simplicity;

So we take an Up-bet at X with a -100 SL and it comes good at +100.
Now we move SL to original entry (we can no longer lose any money on trade 1, but can go down to Breakeven) We add position 2 at X+100 and SL at minus 100 (which still equates to our original entry at “X” )

So now we have a “double normal size” position going forward, but we are asked to tell ourselves “That is ok because we only stand to lose money on one of them. The other is locked to break even”

A couple of days later, we have another decent move and we are now at X+200, so we are moving our stops to “X+100” and introducing another position. So now we have one bet locked in at profit 100, another with SL at breakeven, so again we “Are only betting a single trade” despite the fact that we are actually 300 pips up at the moment. We are encouraged "Not to regard this as ‘Our money’ " since we have not cashed it yet.

So what if instead of just pyramiding into a single bet, we said “Ok cash the 100 pips” and put it in a separate account, then take the next trade at double our normal size. Cash that “double bet” for the 100 pips and re-enter at 3 x our “Normal size”, placing the proceeds of the “cashouts” in the separate account labelled “Not our money”. Is this not the same thing ?

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I don’t think that’s the same. If you cash out the first trade and put a double sized trade on and then lose the 100 pips, then you have lost double the amount of money you made in the original trade. Whereas keeping that trade open and moving the trailing stop but putting another trade on with a 100 pip SL will give break even as the worst case.

I guess you also have more broker costs for commission and spreads with your method too.

Think about that - The first trade breaks even, the second trade loses 100 pips - exactly the same as entering a double position, having cashed out a single.

Oh sorry, I thought the 2nd trade was the same size as the first trade, hence you have double the amount on the trade, not that the 2nd trade was double the size and you now have 3 times the amount. That’s the only way the system makes sense to me.

It works out to the same thing. If 100 pips is £100 and you cash out then lose on the x 2 trade then you made £100 on the first trade at X and lost £200 on the second trade at X + 100 so your net is £100 - £200 = -£100.

If on the other hand you keep the 2 trades open with one losing and the other moving to break even then you have a net of £0 - £100 = -£100

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Here’s the bit I wrote CJ -

I see you’re new to the site, but if you’re new to trading as well, it’s something which is a few months ahead of you yet.

I can foresee even the “Old hands” might find the concept and principle a little challenging - As indeed I am at the moment :sunglasses:

[Edit - Thanks @ropunzel ]

This is a good post, money management is not a topic that is discussed often enough and there is not much literature on the subject as compared to trading strategies. I have never tried this system but it appears to rely heavily on the bet that the market will surge in one direction without any corrections or retracements. In that sense it is a variant of a grid system and I think it would be hard to apply to real world conditions.

That is when you reach point X + 100 are you doubling down on your trade because the market looks like it will continue to trend up or because you are implementing the grid system; what takes priority. Of course the market sentiment should take priority but will that be the case in reality.

Well I feel stupid. I’m going to blame tiredness!

Yes, I am new to trading FX, but I’m not normally that daft haha. And on that note, I’m going to bed…

No problem @chesterjohn , I’m glad you got there :slight_smile:

It bodes well for your future trading, that you are able to say “I was wrong !” - You’d be surprised how many can’t do that ! :sunglasses:


You’re right - it was based on “breakouts” and “New highs” - as such probably more suited to shares than Forex. But even so - It was a loser in the most of it’s bets and I decided at an early stage that “If Turtles lose 9 out of 10, I want to be on the opposite bets !”

However that isn’t my point, the money management is clearly a very aggressive strategy. At first I thought “Tight Aggressive” (poker style) - Now I’m thinking “Loose Aggressive” ! because they bet on anything which went the right way (that was a part of the strategy)

@LaughingCharlie is right, one or more of the original “Turtles” was interviewed by Schwager.

However my interest is less in chasing a single share “to the moon” but in the money management. I’m wndering whether it would be sound to apply the “Winnings” from one trade to the start of the next trade after closing out the first.

It seems from the above, that if you got “2 in a row” correct, the £300 won, could fund a third bet at entirely “No risk” and at a size of 3x ! (If we accept the principle of pyramiding in and Not regarding those winnings as “Our money” !

Clearly though if we accept we have “won” the money, it just becomes a part of “Our account” and we’re back to “the 1-2% rule”

If bet 3 were to come good - from then on in - we’re in clover ! :relaxed:

Interesting follow up from the modified version of the pyramid system. Risk-adjusted return is supposed to quantify how much risk is involved in producing a return (return per unit risk) and a well used method to calculate that is the average return divided by the standard deviation of the returns.

Ideally you want 1) the average return to be as high as possible 2) the standard deviation to be as low as possible. That is for the returns on the banked trades, win or lose.

  • in case one the average return is (100 - 200)/2 = -50 and the standard deviation is 150
  • in case two the average return is (0 - 100)/2 = -50 and the standard deviation is 50

Since the average returns are the same in both cases, it all depends on the standard deviation. The standard deviation for case two is lower so it produces a better risk adjusted return than case one (I think i’ve got that right)

I just think that it is funny how in both cases the results are essentially the same for all intents and purposes. But by simply rearranging how you execute the trade you can manufacture a better track record.

[Edit: not sure if i’ve got that right i’m thinking about where the two options would sit compared to the efficient frontier

but clearly the Sharpe ratio in scenario one is better)

That’s interesting psychology because most people including myself don’t think about banked money as the starting point, it’s almost monopoly money but why should it be, it’s yours and you worked hard for it and should hold just as much value as your starting balance.

Exactly so and that is why I find the “Pyramiding in” Sleight of hand so interesting. - to “Them” - “it’s not OUR money” is the way of life and therefore their stakes are multiplied to levels which would be considered Rash, if bet at those amounts, from “Their account” - Yet the way the presentation is made, there is no criticism.

Yet as we see above, it’s only really a trick of truth distorting" - Something we can perhaps adapt to our own trading in order to wager aggressively ! (Notionaly “without risk” ) :slight_smile: