Money Management, Not Just For The Rich Anymore - General

HellGungrave_777 2007.05.11 22:16 #71

My point here is completly psychological

3000=three or four weekly pay check(depending)

80% ROI = 2400

worst case scenerio 600 dollar lost

100000= one or two years of hard earn profits

80% ROI=80000

worst case scenerio 80000 dollar lost

see the difference??

with great money comes great responsibility

Just my 2 pip

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BrentMack 2007.05.11 22:43 #72

Money Management, Not Just For The Rich Anymore

As has been pointed out, the more you have at stake - the more crucial good MM becomes.

But good money management can also be a tool that helps a trader build a bigger stake. Without it, the act of compounding an account into something sizable can hardly take place.

Granted that limitations associated with small accounts can lead to stretching the basic rules (such as 2% risk), I still believe that they're good rules to grow by.

I'll leave it up to each individual to decide where - but at some point - risking too much money on a trade devolves into gambling rather than trading with a plan.

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WNW 2007.05.11 22:49 #73

Mr. Marketz has clearly explained traditional / correct money management.

It's about sizing your trade lot(s) based on your system performance criteria and how much of your account you're willing to risk on each trade, all for the purpose of staying in the game.

On THIS forum, however, the term is thrown around loosely and somewhat carelessly. Many here interpret MM as using a Martingale or other negative progression system. I would label these techniques as "betting progresssions" rather than "pure" money management.

(Please put away your flamethrowers, I have nothing against betting progresssions...)

Maybe it's just a matter of semantics, but there is a big difference in the two approaches.

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BrentMack 2007.05.11 23:05 #74

HellGungrave_777:
My point here is completly psychological

3000=three or four weekly pay check(depending)

80% ROI = 2400

worst case scenerio 600 dollar lost

100000= one or two years of hard earn profits

80% ROI=80000

worst case scenerio 80000 dollar lost

see the difference??

with great money comes great responsibility

HellGungrave -

I agree with your point, but don't understand the math.

Why is worst case for A. 20%, and B. 80% ?

It seems that both could be 100%.

And for some, that first spare $3000 can be quite a challenge to come by.

But anyway, I agree with your point.

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4xtrader 2007.05.12 01:33 #75

Money management ?

Hi guys just take a look from Van Tharp ( Trade your way to financial freedom, author) about money management.

Hope usefull

Files:

money_management_report_-_van_tharp.pdf 555 kb

SIMBA 2007.05.12 10:15 #76

Bet Size

ryanklefas:
I don't know. "Money management" sounds more like "common sense" to me...

And by the way, this was a serious question, perhaps I could get some more serious answers. I REALLY want to know what money management is.

Thank you, MiniMe for the link.

Imagine that your system,be it discretional or mechanic,has discovered a trading opportunity giving you a sell signal on Cable.

You have 100k in account and 100:1 leverage.. your friend has 1k in account with 200:1 leverage and a different trading system that has given him a buy signal

How many lots you go short?How many lots does your friend go long? The RIGHT answer to these questions is money management...It doesn`t matter if you have 100k or 1k,you need it in any case if you want to survive in the long term

..All the rest,what is your tp and your sl ,do you hedge every x pips or not,etc..is not mm but just an intrinsic part of your trading system

So,let`s proceed with your case..How many lots do you go short?To get the RIGHT answer you need to know and integrate the following concepts.. the first one takes care of "how to maximize your profits" and the second one takes care of "how to minimize your losses"

1-Kelly ratio:Your optimal bet size..Kelly % = W – [(1 – W) / R] ,Where:

W = Winning probability and R = Win/loss ratio ..so for a losing system ,or even a neutral system(ie:50% wins and 1 win loss ratio)the answer will be..

Kelly % =0.50-[(1 – 0.50) / 1]=0.50-0.50=0.00..DON`T BET,DON`T TRADE

And for a winning system,let`s say 60% wins and 2.0 win loss ratio the answer will be..

Kelly % =0.60-[(1 – 0.60) / 2]=0.6-0.2=0.4..so you "should " bet 40% of your Equity and this will get you the optimal return..Right?

Not so,you need another concept.

2-Risk of Ruin:Life is hard and then you die,and trading is a specially hard part of Life if you don`t get it right..so ,you should pay special attention to this concept..Theoretically risk of ruin is the probabilty of halving your account before doubling it,just for your info,kelly ratio has a risk of ruin of 33%..but the important thing,the concept you need to understand is more basic,and more useful

Basic definition:An example is worth a thousand words..Say We are trading on the outcome of a coin being tossed.It is a fair coin.That is 50% of the time it comes up heads, 50% of the time tails.You are trading on heads.

And I am very kind, I will pay you out twice your stake(trade) if you win, and keep your stake(trade) when you lose....You can still lose, Imagine your total capital was $100.And you bet it all on the first toss of the coin...And it came up tails...so your erroneous trade size destroyed your account on a very profitable trading system

But no-one would be so stupid to risk it all on one trade..or yes?. Right,on both counts ...and that is the point...How do you know what is the right position size – the maximum amount to trade each time?Let us look at how likely a run of tails (bad news for you) is, for say, 4 tails in a row..0.5*0.5*0.5*0.5*=0.0625..6.25%..so,if you risk 1/4 of your total cumulative equity in each coin toss your expected dismissal will be in 100/6.25=16 trades..so 1 in each group of 16 coin tosses you can expect to find a cluster of 4 consecutive tails ..again,you had a profitable system,and you ended up destroying your account..you get it ..Right?Then how to integrate the 2 concepts,in a practical manner..

3-Practical "RIGHT Answer":100k equity,60%W,R=2...Remember..your Kelly% was 0.4..Now..

A)Test your system on at least 5 years of data,if mechanical,and see the maximal drawdown and the % drawdown for 1 lot(or 0.1,0.001..your standard position size)..

For example let`s say the maximal dd was 10k and the relative dd was only 5%(because at that moment your cumulative equity was 200k from your starting 100k)..

TAKE THE HIGHEST OF THE 2..why,because you have a system that can cumulatively lose 10k on 1 lot,the 5%(instead of 10%) was due to having started in a "lucky" period..

B)If your system is manual check your trade statistics and obtain your cumulative dd,if not enough history,then do a Montecarlo simulation with your trade parameters and take the worst "Montecarlo drawdown"

let`s presume your case is A..then you do the following formula..

RIGHT RISK=(KELLY Ratio*Equity/worst dd)*1000$=(0.4*100k/10k)*1000$=4k$..this the risk you can allow in your trades that will guarantee both near maximal profitability and very long survival probability..so..the Right answer to how many lots you should short will depend on were you would locate your stop or exit the trade..imagine stops at 34 pips and 6 pips slippage..so your "1 lot risk"would be 40 pips=400$..then your position size should be

RIGHT POSITION=RIGHT RISK/1 LOT RISK=4K$/400$=10 LOTS

Now your next trade with the same system, has stops at 14 pips(your system says that stops depend on volatility,for example,so,they are not always at a fixed distancefrom entry) and same 6 pips slippage..1 lot risk is 20 pips or 200$..then your right position for that new trade would be 4k$/200$=20 lots..etc,etc,this is a dynamic process,as life..and trading

If you take any profitable system,or any system that has tested profitably and safely for a certain period,for 1 lot,just do the numbers and compare the EQUITY curves with 1 lot and with RIGHT POSITION for the tested period and for other untested periods..this will be the best argument to convince yourself..

Additional concepts you may want to google are "optimal f","Montecarlo simulation" and "fixed ratio mm"

Regards

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