The transition from demo account to live account a few months ago was a lot harder than I thought it would be. Even with a very small account and very conservative money management the emotions (fear and greed) were much stronger than I anticipated. I have been addressing those personal weaknesses but I have also been looking for ways I can adjust my money management to try and compensate.
This month I have been using a risk skew on my money management. Each week I start with a ‘new’ book and set my risk per trade to 1%. That means when I enter a trade and set my stop, if the stop gets hit I only lose 1% of my account. Of course I have been working on cutting my losses short so if price action tells me I entered at the wrong time I get out, which results in less than 1% loss most of the time. I skew my risk based on the following;
[B]Weekly Risk Skew:[/B]
0% to 3% book balance - 1% risk per trade
3% to 6% book balance - 1.25% risk per trade
6% to 9% book balance - 1.5% risk per trade
9% to 12% book balance - 1.75%risk per trade
12% to 15% book balance - 2% risk per trade
-1% to 0% book balance - 0.75% risk per trade
-2% to -1% book balance - 0.5% risk per trade
-3% to -2% book balance - 0.25% risk per trade
Greater than -3% book balance - 0.25% risk per trade but only 1 loss per day and than I quit for the day
The reason I settled on a skew like this was based upon the fact that in the limited time I have been trading live there are times I felt ‘in the zone’ and have a very high win percentage, and then there are times where I can’t seem to pick the right direction and have a string of losses. The risk skew capitalizes on those times when I am in the zone by allowing me to slowly adjust my risk skew upwards with each 3% increase, but also keeps book preservation in mind by only skewing up .25% for every 3% gained. The negative skew keeps my account from taking a bigger hit than needed when I fall out of the zone and have several losing trades in a row.
This skew has proved itself very beneficial not only for the psychological aspect of my trading but also for capital preservation. Week 1 of November was a great week and I was able to keep skewing my risk up with each 3% gain. Week two was the worst trading week of my short career but my risk skew ensured that I ended a very bad week still up for the month, which does wonders for the emotions at the start of the next trading week. This week has not been that great so far, but again I am still up on the month.
The aggressive lowering of risk based on a negative book balance also has been helping me analyze each trade more thoroughly before I jump in, knowing that if I enter a lower probability trade and lose I am going to be risking the ability to trade more than once per day if my book falls below -3%. I find myself attempting to pick only higher probability trades now, as opposed to August, September and most of October which found me jumping in before really trying to get a better understanding of what I was jumping in to.
JJ
BTW, I use Oanda and trade in units, so I am not limited to trading only lots. This allows me to get very precise with my risk per trade.
