Money management in a nutshell. Part 1 - Page 3
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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. #21
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    [lang=ar]Hello Balijmaa I am new to this forum and I lost the big thing I want some lessons for beginners like me where there are these lessons I do not speak much research in the forum is received and all the lessons I see the highest level of intellectual and my knowledge Please help[/lang]

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  3. #22
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    Quote Originally Posted by Touhid View Post
    Money management is one of the greatest part of this business. When trader are trading on this business that time trader of some are getting loss and some are getting profit. Basically most of the loser traders fall in loss by the lacking of money management. When we are having this type of money management then we are able to making money also.
    Yeah,forex is highly profitable business but it is not so easy task to earn from.To earn from here every trader have to maintain money management rules that means money should invest according to the risk and profit.Sometimes every trade does not go the calculated direction then we can get a lot of losses in trade.For this reason we should set stop loss in trade so that our losses will be a minimum amount.

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  4. #23
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    i thank you very match for this important suject about money mangement .. all traders must use astrong mone mangement not to lose their accounts quickly

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  5. #24
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    Investor may mister system You shouldn't learn exactly why customers defend making use of total stand still lessening the many of these which employ deduce go might actually be this rookies which needn't lase profits in order that they employ deduce lessening but question virtually any fantastic dealer they'll alert an individual within absolutely no cases to utilize this determine for the moment having attentive to advance. after that lessening might research surely immediately, and give way up set up for being rather lessened, sometime zero. after that merely conclusion tumble may additionally help in keeping you. therefore employ total stand still lessening For each in addition to every single having in addition to giving place is quite a bit healthier.

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  6. #25
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    It's an extremely easy program regarding minded individuals that are simple and I love that. In my opinion champions Cash administration is among the best section of e-commerce should be allow by you. 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. A broker champion can be made by a great cash operations usually. Without cash management that is correct a broker can unable to perform an effective and nicely industry. A broker can unable to conserve the accounts without cash supervision that is correct. And so I believe cash administration is not truly unimportant.

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  7. #26
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    moneymanegment is the most important part of the forex market it is necessary for all the trader if the trader want to avoid loss and want to make good profit it gives us descipline to trade and enter right time in the market if we dont use it we will not make good profit.

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  8. #27
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    basically there is no way money can be earn in this business of trading the market if the money place used is poor regardless of how complex this business might be if a trader understand the important level in this business when trading such trader can earn with a good money plan when trading the market,the general rule of money management of 2% is very helpful

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  9. #28
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    We need to have very and very good money management and money bussines. This bussines is very preciouse for every trader. We need to pay maximum attention for every step we do. Because we are working with real money. We need to organize ourself our proper money management. This type of money management will help us to coordinate our money and our trading capital.

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  10. #29
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    I am new to this forum and I have lost a great deal I want some lessons for beginners like me that these lessons do not speak a lot of research on the forum and all the lessons that I have received the highest level of intellectual and knowledge

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  11. #30
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    Quote Originally Posted by meandforex View Post
    I am new to this forum and I have lost a great deal I want some lessons for beginners like me that these lessons do not speak a lot of research on the forum and all the lessons that I have received the highest level of intellectual and knowledge
    Before you get into the market, man, you need to do very nice study. You need to get education . Without any knowledges you will continue loss your preciouse money. So, get some e-book about trading and start study the technical analysis and the fundamental analysis. You get familair with technical indcators, get how they works in the market and how use such indicators. This is very long and routing work. My best.

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