Money management in a nutshell. Part 2 - Page 3
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Thread: Money management in a nutshell. Part 2

  1. #1
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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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  2. #21
    Trader dkarev's Avatar
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    aside from the strategy we might be using to trade the market,making use of proper money plan is the best way to make something in this business,if our money plan is good our trading strategy will surely work because a trading strategy that dose not work with a good money plan will surely end up losing the fund we might invested in it

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  3. #22
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    I do like to chase the money administration rule. It is actual defended for our capital. We additionally charge to barter according to our pips calculation.its important for traders. If we barter from a able abutment and attrition breadth our barter will be accident free.we will b safe...we shoudntb booty accident

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  4. #23
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    Great lesson sir thanks for that I think money management is an crucial part of our trading well fixed ratio trading system is looking much better its not looking much complicated rather than other methods the good thing is we are no raising our lot size in this method we are just depositing more money and trying to make more money.

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  5. #24
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    [lang=id]Forex is a usually a great online good business.there is a proverb goes that '' no risk no gain''. so the more you take risk the more you can make profit. but if you fail to make profit in high risk, you have to count a heavy loss which can be disastrous for the health of your capital.it is very interested and important business forex can change my life and thinking.[/lang]

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  6. #25
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    Money management is always be the most important element in trading because a better money management system will surely increase our profit in forex market and decrease our loss in this business so it is the most vital for us but making a good money management system is not easy , it needs much practice and hard work by the trader.

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  7. #26
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    if one want to earn then i think that he has to learn about the market and then he can make profit so learn about the amrket adn tehn make profit as much as you want just need to have a perfect theory and stragtegy to make profit so learn about the market and then make profit as much as you want no need to learn about the market more

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  8. #27
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    Quote Originally Posted by nazrulcpi786 View Post
    Money-management-in-a-nutshell-Part-2Let's continue talking about money management and it's importance for trader. In the previous post on this topic I've mentioned that fixed ...
    I myself think that in this forex business then there are the two most important things that should traders develop their trade merchants that they should be able to then develop their trade by doing this trade with market analysis and then after they develop well in the market analysis trading then they will desperately need their trading risk management so that they will be successful in this business when the analysis and money management is very good

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  9. #28
    Trader dkarev's Avatar
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    Quote Originally Posted by COMANG View Post
    I myself think that in this forex business then there are the two most important things that should traders develop their trade merchants that they should be able to then develop their trade by doing this trade with market analysis and then after they develop well in the market analysis trading then they will desperately need their trading risk management so that they will be successful in this business when the analysis and money management is very good
    you are right,no matter the kinda trading skills might be having to do this business and the strategy used to trade the market if our trading plan is poor we are bound to struggle to make something in this business when trading the most important thing in this business is the kinda understanding we are having to trade the market when trading

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  10. #29
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    Quote Originally Posted by gmmasud88 View Post
    if one want to earn then i think that he has to learn about the market and then he can make profit so learn about the amrket adn tehn make profit as much as you want just need to have a perfect theory and stragtegy to make profit so learn about the market and then make profit as much as you want no need to learn about the market more
    well brother. I think our knowladge help us for practice , and practice help us for market understanding, and when we continue our trading then we face many thing on our trade and we do many mistake but it's our experience. so in my view FX learning means learn from your mistake

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    Don't loss you hope.

  11. #30
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    Quote Originally Posted by featurelion View Post
    Money management is always be the most important element in trading because a better money management system will surely increase our profit in forex market and decrease our loss in this business so it is the most vital for us but making a good money management system is not easy , it needs much practice and hard work by the trader.
    I agree in the trade that we have a financial arrangement is the most important thing which every element of the element that exist in trade has the greatest ratio among other elements, among others, such as trading systems and psychological control

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