Money management in a nutshell. Part 2
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    Money management in a nutshell. Part 2

    Let’s continue talking about money management and it’s importance for trader.
    In the previous post on this topic I’ve mentioned that fixed fraction and fixed proportion methods are simpliest methods for a trader. In the first case you define fixed amount of money you are willing to put at risk, in the second – you calculate it every time basing on your current cash size on your account.
    Now let’s continue:

    Optimal «f» method

    This method is quite sophisticated and was developed by Ralph Vince and popularized by Larry Williams. Ralph Vince has written many books on mathematical approach to money management – you can find them easily on the web.
    The main idea of this method is that trader should define ideal fraction for each trade according to some formula. Ideal fraction means that if formula tells you to put at risk 15% of your entire account, you have to do this.
    For example, if you want to determine number of lots (shares) that should be traded for your position, formula will look like this:

    N = (F * equity/risk)/price

    F parameter is defined upon historical data. I will not talk too much about it. In my personal opinion, this method can’t be applied for practical purposes.
    Putting 15-20% of account at risk assumes that we rely too much on historical performance of the market, but we know that too often it is not that easy. Current market conditions change and if you rely too much on the past, you might find accept too much risks.
    But I’ve decided to include this money management method in my review for your education. If you want to know more about this, you can search the web for books of Ralph Vince.

    Fixed ratio

    As for me, much more interesting method is «Fixed ratio» money management method designed by Ryan Jones. We have been talking about methods that are not too complicated – «fixed fraction» and «fixed proportion». Fixed ratio is a bit more complicated but not too much.
    In a nutshell, we are allowed to increase size of the position as our account grows, but not too quickly.
    For example, if we earn 10% on our account, we may increase our lot size by 10%. If we then add another 10% and earn 20% to our initial deposit, we don’t raise our lot. We do it only when our deposit will grow 30%, then 60%, 120% and et cetera.
    This is very brief explanation of the principle, but it makes sence because the more we trade, the more we increase probability of getting into drawdown, and if you simply increase our lot size in sync with our account size, we may experience large relative drawdown (lot size is increased and any losing streak will affect our account greater than before)

    In other words, this method tell us not to be in hurry – to raise our lot size slowly. But of course, there is mathematical background beyond those words. If you want to know more about it, you can find book of Ryan Jones «The trading game. Playing by the Numbers to make millions»

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    Rookie rinaji's Avatar
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    I'm more interested in using the "fixed ratio", and I think many traders are using this method. Honestly, I have never heard about "Optimal« f »method". But I am interested in the formula that you gave for this method. Although I am still confused how to calculate with this formula, I do not understand what is meant by F parameter. Maybe I should learn more about this method from the book. Quite interesting to learn about this formula...

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    If you lose, be patient. If you win, stay humble

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    Registered user Quid's Avatar
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    Quote Originally Posted by rinaji View Post
    I'm more interested in using the "fixed ratio", and I think many traders are using this method. Honestly, I have never heard about "Optimal« f »method". But I am interested in the formula that you gave for this method. Although I am still confused how to calculate with this formula, I do not understand what is meant by F parameter. Maybe I should learn more about this method from the book. Quite interesting to learn about this formula...
    Yes,i also like to use fixed ratio for trading,the method which is designed well by Ryan Jones with easy to learn method and friendly for the traders with simple money management to calculate the risk,it is one kind which i seek in the forex market,better than to trade with other method.

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    Quote Originally Posted by rinaji View Post
    I'm more interested in using the "fixed ratio", and I think many traders are using this method. Honestly, I have never heard about "Optimal« f »method". But I am interested in the formula that you gave for this method. Although I am still confused how to calculate with this formula, I do not understand what is meant by F parameter. Maybe I should learn more about this method from the book. Quite interesting to learn about this formula...
    Yes, this is abstract and complicated method, but you can know more from the book. Ryan Jones is much more understandable reading and his methods (like fixed ratio) are more applicable for trading.

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    Thank you for your explanation. All the while i'm using fixed ratio and haven't heard about Optimal «f» method. I think it is time to look for the book and study it.

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    I suppose that more easy is the method then more easy will be used on our trading job. So, the money management is the system or strategy too like the trading strategy. Then if we will choise more easy such strategy then we will use it with less mistakes. And we need to avoid the mistakes anyway. So, like for me the fixed ratio style of money management will be more used in the trading.

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    i guess fixed ratio is simpler and i prefer or have already used it ( but i did not know the name of this method until you write down the articles before. thank you very much ) and especially for my trading system, scalping, i increase my lots for several trades and if meet the target, i increase it again, then my balance will grow with same percentages

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    I like to follow the money management rule. It is very secure for our capital. We also need to trade according to our pips calculation. It is very necessary for all traders. If we trade from proper support and resistance area so our trade will be risk free.

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    Registered user lawners1791's Avatar
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    actually im working with the Equity/maxordernumber/max pips per order with the calculation of the lotsize and to focus with the keeping of the tradig on sustaining the progress by the constants of the work with the ascending lotsize by the good run.
    i guess later would be better to add more of the details to improves of the chance on saving and running of the good standing.

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    Quote Originally Posted by Jamuna View Post
    I am very weak in money management resulting which I cannot able to do better in this trading. Through this thread I came to learn about it elaborately and obviously it will help me in rendering my further trading with better money management ability. I like this educator very much and become very much helpful. Expect such types of education tool will continue to teach the newbies like me.
    You need to do the routine practice in your personal money management. The good money management is very important in our personal trading job. We need to know strongly how to do the money management. And we need to have very good practice in the money management. We have to think all the way about safety for or trading capital. This is very and very important.

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