Money Management Question

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It's high, relatively speaking.

We don't know your W/L ratio, profit factor, average win, average loss, most consecutive winners and losers, etc..

Let's say you have 500 units in your account.

You're risking 30 units if you lose.

30/500 = .06, or 6 percent risk.

500/30 = 16.67, so you can only afford 16 losses in a row. Those aren't good odds.

Between 1 and 2 percent is a more reasonable figure, it's sort of a rough rule-of-thumb.

There's a very good post about money management on this forum by Simba; you really need to know MUCH more about your system's total performance to make good decisions regarding money management, it's not as simple as I may have made it sound.

If I can locate the post I'll include it here later.

If you don't mind some advice, I think you should paper trade your spread betting for a good while before risking real money.

--EDITED---

Simba's post follows (it may not seem pertinent to spread betting, but it is):

Imagine that your system, be it discretional or mechanical, 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"

(end)

 

OK thanks for the post I thought the rate of return seemed a bit high to be safe I finnished my first week on 53% return.

Il stop trading while im ahead for now and test my system on paper to find the risk ratio.

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