Money management in a nutshell. Part 1
Page 1 of 87 123451151 ... LastLast
Results 1 to 10 of 939

Thread: Money management in a nutshell. Part 1

Hybrid View

Previous Post Previous Post   Next Post Next Post
  1. #1

    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%.

    capital.png

    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.

    martingale.png

    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…

  2. #2
    Thanks for this useful thread, I've been using all the methods that you mentioned. Martingale, Fixed proportion method, and fixed-fraction method.
    But honestly, I've been traumatized by Martingale, 1 year I use martingale method, I always get sad condition at the end of the story. That's the reality that I have experienced. I did some experiments with variations of a martingale, including: averaging martingale, hedge martingale, pyramid martingale, martingale + stop loss (single position) based on signals, etc.. All I've ever done.

    Now I only use the last two methods in some of my accounts, fixed proportion method, and fixed-fraction method.

    One more note, I still find a lot of traders that determine risk for each trade, but does not run properly, either do not understand or somehow. For example: we set 10% risk per trade, but allow floating minus position more than 10%. So the maximum drawdown is more than 10% of the equity, I think it is not right.

    I am waiting for an update from this thread, interesting to learn more, I am still trying to learn, learn, and learn again.
    If you lose, be patient. If you win, stay humble

  3. #3
    Quote Originally Posted by rinaji View Post
    Thanks for this useful thread, I've been using all the methods that you mentioned. Martingale, Fixed proportion method, and fixed-fraction method.
    But honestly, I've been traumatized by Martingale, 1 year I use martingale method, I always get sad condition at the end of the story. That's the reality that I have experienced. I did some experiments with variations of a martingale, including: averaging martingale, hedge martingale, pyramid martingale, martingale + stop loss (single position) based on signals, etc.. All I've ever done.

    Now I only use the last two methods in some of my accounts, fixed proportion method, and fixed-fraction method.

    One more note, I still find a lot of traders that determine risk for each trade, but does not run properly, either do not understand or somehow. For example: we set 10% risk per trade, but allow floating minus position more than 10%. So the maximum drawdown is more than 10% of the equity, I think it is not right.

    I am waiting for an update from this thread, interesting to learn more, I am still trying to learn, learn, and learn again.
    Well this is a very new strategy, i think i never heard about this strategy rina ji before personally i like to do trade by following market trend this type of trading strategy is very differ from my own analysis and trading strategy i need a lot of practice for this i will try to test this strategy also and hope you will add more screenshots in near future in this thread
    i use the metatrader4 for iphone in apple store and i see its very closet because you cannot use it as well as the windows version who can use a lit of options to trade easily with some costume indicators or experts or scripts
    so please give us a best metatrader for mobile

  4. #4
    Registered user
    Join Date
    Feb 2015
    Posts
    4
    Quote Originally Posted by rinaji View Post
    Thanks for this useful thread, I've been using all the methods that you mentioned. Martingale, Fixed proportion method, and fixed-fraction method.
    But honestly, I've been traumatized by Martingale, 1 year I use martingale method, I always get sad condition at the end of the story. That's the reality that I have experienced. I did some experiments with variations of a martingale, including: averaging martingale, hedge martingale, pyramid martingale, martingale + stop loss (single position) based on signals, etc.. All I've ever done.

    Now I only use the last two methods in some of my accounts, fixed proportion method, and fixed-fraction method.

    One more note, I still find a lot of traders that determine risk for each trade, but does not run properly, either do not understand or somehow. For example: we set 10% risk per trade, but allow floating minus position more than 10%. So the maximum drawdown is more than 10% of the equity, I think it is not right.

    I am waiting for an update from this thread, interesting to learn more, I am still trying to learn, learn, and learn again.
    All the traders and peoples know that forex trade business is more and more risky and loser machine. but we should not disappointed. because money management can help us to make huge profit from forex trade business. so i agree with you money management is a nutshell part 1.

  5. #5
    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.

  6. #6
    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.
    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.

  7. #7
    Registered user
    Join Date
    Aug 2013
    Posts
    2,526
    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

  8. #8
    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.
    Yes, the most important basics that must be upheld by a trading plan is to have a hand-drawn objectives, in addition to the money management strategy so that they are positioned to protect capital and maintain it, with the knowledge of the most important points of self-discipline that must be displayed by the merchant during trading. It also must include a plan to determine the percentage of profit and loss in line with expectations

  9. #9
    Quote Originally Posted by siham.msd View Post
    in addition to the money management strategy so that they are positioned to protect capital and maintain it,
    Right and correct, man. I suppose that the protection of our traidng capital is the main point of the money management. This has to be in the main part of our trading plan and in the personal trading strategy. We need to think about safety of trading every time and every day. Because the market is very risky. For this reason we need to think about that very hard.

  10. #10
    In fact, considered to capital management in Forex is the application of the principle we see always in our public life , even if run into losses in the beginning With our use of basify sound and Mmstmrh , ultimately, you can control your losses and also give life chances of losing are also given opportunities for profitable can it be contraction of losses example assuming you entered 6 opportunities lost in 3 and won in 3, but you rely on the principle that states not to enter into chances profit less than twice the stop loss will find you even though you've been to a number of opportunities Losers equal to the number of opportunities Winners should not be Your profit is equal to twice your loss and we will clarify this more during the rest of the lesson.

Page 1 of 87 123451151 ... LastLast

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •