Money management in a nutshell. Part 1 - Page 2
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  1. #1
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    Money management in a nutshell. Part 1

    Hi traders. I’ve looked over the forum and haven’t found any decent thread about money management and this topic is not just important. Proper money management distinguishes survival from failure.
    I see too many traders with enough experience who continue blowing up their accounts over and over again just because they fail to manage their capital properly, they take too much risks for their positions.

    Why is this important?

    You may ask – if my trading system is good and I can generate good entries on consistent basis, why I should care much about this? I can take high leverage and earn money, that’s how it works, isn’t it?
    No. Our ability to predict market moves or even be right more than 50% of the time is limited naturally. By accepting this fact you recognize that in your trading you WILL have drawdowns. You will have losing days, weeks and months (I hope, not years, but it is also realistic). And you have to be prepared. Of course, you will do everything to reduce your drawdowns, to adapt your strategy or trading plan to changed market conditions, but drawdowns are the part of the game – one can’t sustain permanent growth without corrections.
    Once you accept the fact that your abilities to predict market action (as well as any other person’s abilities) are limited, you come to importance of money management. You need to survive.

    Mathematics of survival.

    Let’s assume that we use very simple money management principle – in each trade we risk certain amount of capital, say – 2, 3 or 5%. If you had, say, 1000 USD at the beginning of this process and put 5% at risk, you will have 950 USD if you are stopped out of your position. After that, you will be able to risk only 950*5% = 47,5 USD and so on.

    In a graph shown below you see quantity of losses that you can possibly have before losing entire capital. Of course, it’s just theoretical graph – it doesn’t take into consideration lowest possible trading size, margin, spreads and commissions. But it shows that when your raise your lot size, you decrease robustness of your trading in non-linear way. Having 6% of capital at risk is more than 2 times riskier that having 3%. Having 10% at risk is more than 2 times riskier than 5%.

    Attachment 10666

    To survive possible tough times, your trading needs to have enough level of robustness. Even if you flip a coin, you will have greater chances of survival if you apply appropriate money management rules. But if you analyze the market and achieve good profit/loss ratio, you would expect not only to survive but also to have your equity curve going forward.

    Martingale:

    The easiest way to blow up your account is applying martingale principle. You increase your lot size twice after being stopped from the position. In this case you have basic assumption that market will inevitably return at least to a point where you opened your first position. You average your loss expecting to cover it if price returns. In most cases it works, it may even work for some long period of time, but in case of directional break, your losses will inevitably exceed your available margin – thus, your account will be liquidated. «Not for me, not this time» - this is a prayer of every martingale trader.

    Attachment 10667

    Fixed proportion method:

    That’s the simpliest money management principle. You just take 2-3% of your capital (or whatever) and calculate it from your available margin (deposit size). When size of your deposit decreases, you also reduce your size, when it increases, you slowly increase your size.
    Every money management principle has it’s benefits and drawbacks

    Benefits:

    Robustness, ability not to lose much in case you experience unexpected drawdown

    Drawbacks:

    Slower recovery. If you would risk fixed fraction in your trade (say, fixed amount in dollars), you would recover more quickly in case of drawdown. But of course, in this case you would accept greater risks

    Fixed fraction method:

    In this case you simply put predefined amount in dollars at risk in each trade. If you start with 2000 USD and decide to put 100 USD at risk in each trade, you are not expected to change this trade size even if your equity goes down. But you should increase your lot size as your equity curve goes up.
    This money management principle is the most aggressive and definitely not recommended for beginner traders.
    Your leverage will increase as (if) your equity goes down and your risks too.

    Benefits:

    Quicker recovery from drawdowns

    Drawbacks:

    Relative loss size (and risk) increases as equity goes down

    To be continued…

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  2. #11
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    Quote Originally Posted by Touhid View Post
    I am also agree with you that money management is very important part of this business. With the help of this components people are easily lead their business, otherwise people are also loser here. Proper working plan and good money management when combined with each other then people must be earning profit from this business more and more.
    as long as the merchant is able to carry out their management with good money in this trade then I'm sure they will be much better and safer from the threat of a big risk because when we do this trade regardless of the condition of the money management in trading then this will make us to be in this trade will be able to continue this trade will get so bad that the role of money management discipline should continue to be improved

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  3. #12
    Registered user Quid's Avatar
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    Quote Originally Posted by Value trader View Post
    Martingale:

    The easiest way to blow up your account is applying martingale principle. You increase your lot size twice after being stopped from the position. In this case you have basic assumption that market will inevitably return at least to a point where you opened your first position. You average your loss expecting to cover it if price returns. In most cases it works, it may even work for some long period of time, but in case of directional break, your losses will inevitably exceed your available margin – thus, your account will be liquidated. «Not for me, not this time» - this is a prayer of every martingale trader.
    Martingale is not good for trading,in my way of trading i avoid to do martingale,whenever i see my position is in loss i will have two options,to close the position before the loss higher or to hedge my loss,usually i choose to close my position at that time,i never think to do martingale because if our prediction is wrong then we must pay double loss from our trades.

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  4. #13
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    i do not want to complex my trade.we many traders want to learn more about trade and for that we are making our trade complexity applying a good money management and trading with a good trading plane and with practical trading skills we can easily earn any profit from forex.

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  5. #14
    Trader kagho's Avatar
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    Quote Originally Posted by Value trader View Post
    The easiest way to blow up your account is applying martingale principle. You increase your lot size twice after being stopped from the position
    yes the moment we double the lot size its like we have doubled the risk in a trade and the worst part is if you do it after experiencing a losing trade as you will now put your account at more risk of getting a margin call as you will not be having enough account balance to support the trade yet the risk is double

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  6. #15
    Registered user Quid's Avatar
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    Quote Originally Posted by kagho View Post
    yes the moment we double the lot size its like we have doubled the risk in a trade and the worst part is if you do it after experiencing a losing trade as you will now put your account at more risk of getting a margin call as you will not be having enough account balance to support the trade yet the risk is double
    If we want to make good trading then we need to learn trading without breaking the money management,doubling the lot size or open new position with martingale style then it will really be the way we stopped out the account when trading in volatile market time.

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  7. #16
    Trader kagho's Avatar
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    Quote Originally Posted by Quid View Post
    If we want to make good trading then we need to learn trading without breaking the money management,doubling the lot size or open new position with martingale style then it will really be the way we stopped out the account when trading in volatile market time.
    no i dont think that we may even need volatility to get a margin call all there is for the margin call to come about is just a slight move of market in the opposite direction of our order and we get the margin call even the normal market fluctuation is enough to to that

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  8. #17
    Trader YAHOO21's Avatar
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    Surviving in such a volatile market like forex without a proper trading plan is almost impossible , and why is that ? the reason is fairly simple , the forex market changes very rapidly and to you need to keep with this change by developing you trading system to adapt to such changes in the market .

    Success in forex market is not about making huge profits , let`s say for example that you made like 1000$ in one day , you might now think of your self as a good trade , but unfortunately this is not true at all , as success in the forex market is not not about big profits , it`s more about sustainability and how to preserve the profits you have made , and so every trader need to have a trading plan .

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    TOMORROW IS A BETTER DAY

  9. #18
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    Cash administration is one of this business' best section. Whenever broker are investing with this company that point broker of several are becoming some and reduction are becoming revenue. Ostensibly all of the merchants that are loss drop from the missing of cash supervision in reduction. Whenever we are experiencing this kind of cash administration next we're to earning money additionally in a position.

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  10. #19
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    Thanks it is such a good work also good benefit for your business.

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  11. #20
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    [lang=id]Trader can mist don't know why people keep using stop loss the most of them who use stop lose will be the newbies who don't want to lase money so they use stop loss but ask any good trader they will tell you not to use it take for understanding trend. then loss may come very fast, and quit become very low, sometime zero. then only stop loss can save us. so use stop loss for every trading position is better.[/lang]

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