Lot Sizing (Money Management System) - Which one you prefer? - page 4
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Mr4Rana:
You do not need to teach me about money management. Really. And especially if it is about such a simple method as fixed lot. I know exactly how this method works (and also how plenty of other methods do) and that's why I stated that % risk is superior to fixed lots. You have deliberately chosen a subset of example of calculations that favours your method, but just as Ubzen said:
"Note that both the 2% and Kelly will outperform the fixed_lots (due to compounding) as the number of trades increases (assuming the stats stays the same)."
So if you want to educate traders, do not publish such information as it will lead people to false assumptions that fixed lots is the best position sizing method.
And once again:
- you will never reach your earning potential while winning (as 300$ might become 0.1% or 0.01% of your capital, and such trades won't have any considerable impact on your earnings)
- you will take way too much risk when losing (as 300$ might become 10% or 20% of your capital and you could wipe out your account completely before you even realize it)
So briefly speaking, with fixed lots you are far from being close to optimal position sizing, no matter if you win or lose. The more trades, the more obvious it becomes.
Believe me or not, what you are writing in your post are the very basics of money management, and you repeat the name of the website that you used to learn like a mantra - without really delving into how do different position sizing techniques work and what are their pros and cons. Instead of basing on it and negating better techniques, go read some decent books on money management / position sizing - Van Tharp, Ryan Jones, Ralph Vince, Thomas Stridsman etc. and then think this subject over again.
Ubzen:
You say:
"By recommending 2%->3% risk per trade, there's an assumption that the trader has an Edge of 2%->3%. If their actual Edge is less then 2% then they'll be Over-Betting according to Kelly. This would cause them to suffer Deeper_Drawdowns or just hit Ruin. A simple example of this would be someone who's using a Losing system. Like Open_Positions at Random with 10-pips (Sl & Tp). Telling him to Risk 2% on his 10_Pips wouldn't help at all."
First of all, Kelly % rarely is as low as 2-3%. It is very often a two-digit number, hence it has brought numerous traders to ruin (as they usually traded the suicidal max Kelly %). Fraction of max Kelly % is much safer, but I agree with what you said earlier - it still goes down to being able to continuously refine the trading statistics in order to alter the Kelly % accordingly. And honestly speaking, this is rarely the case as people do not adhere to it.
Secondly, with the 2% risk, you would still need over 50 losses in a row to go bankrupt. This is marginally possible in terms of statistics, as even 10 losses in a row in a binary ("coin-flipping") system is not very possible - see below:
To be completely clear - I am not saying that fixed % risk is the best position sizing technique ever. Not at all. There are other, more complicated techniques that you can use to achieve far better results. Nevertheless, from the basic, computationally simple position sizing methods, this one is the best choice in most of cases.
Ubzen:
You say:
"By recommending 2%->3% risk per trade, there's an assumption that the trader has an Edge of 2%->3%. If their actual Edge is less then 2% then they'll be Over-Betting according to Kelly. This would cause them to suffer Deeper_Drawdowns or just hit Ruin. A simple example of this would be someone who's using a Losing system. Like Open_Positions at Random with 10-pips (Sl & Tp). Telling him to Risk 2% on his 10_Pips wouldn't help at all."
First of all, Kelly % rarely is as low as 2-3%. It is very often a two-digit number, hence it has brought numerous traders to ruin (as they usually traded the suicidal max Kelly %). Fraction of max Kelly % is much safer, but I agree with what you said earlier - it still goes down to being able to continuously refine the trading statistics in order to alter the Kelly % accordingly. And honestly speaking, this is rarely the case as people do not adhere to it.
Secondly, with the 2% risk, you would still need over 50 losses in a row to go bankrupt. This is marginally possible in terms of statistics, as even 10 losses in a row in a binary ("coin-flipping") system is not very possible - see below:
I'm pretty sure you know this stuff. I would just like to make some clarifications for the newer traders who make up the majority of this forum.
1) The 2% is suppose to be based upon Equity_Remaining. Not upon Initial Deposit. Whenever someone is risking 2% of whatever they have remaining, they cannot go broke.
2) Why bring up number of Losses in a Row ... Usually when people go broke it's not because of Losses in a Row. An alternating Win-Loss series where the Losses exceed the Wins (by 50) would also have the same effect.
3) The Objective for most traders is not avoiding Ruin, rather its trying to make Money. So the focus of making sure you do-not go broke || slowing the speed upon which you go broke has little value. If I wanted to make sure I do-not lose my $100, I'd leave it in a traditional bank account.
........................Limitations.
An obvious limitation to money-management theory vs practical application as in the case of #1 is that there's a House_Minimum (aka Minimum_Lot) at which point you cannot break your %risk down any smaller. At this point all Fractional Sizing breaks down to Flat_Betting.
**** I'm no Mathematician, Statistician .. etc. These are mostly my opinions && world views based on my limited experiences.
Fully agree on the three above points that you mentioned.
With regard to below:
"An obvious limitation to money-management theory vs practical application as in the case of #1 is that there's a House_Minimum (aka Minimum_Lot) at which point you cannot break your %risk down any smaller. At this point all Fractional Sizing breaks down to Flat_Betting."
Of course. However, this was more of a problem 10 or 15 years ago, when the initial deposit and the lost sizes posed a serious thread to many individual traders. Nowadays, with microlots and mini-accounts (and very small minimum allowed trade size), it is not such a problem any longer on most of the markets / with most of the brokers.