Money management in a nutshell. Part 2 - Page 75
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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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    Quote Originally Posted by AndreyB View Post
    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.
    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, if you have good money management they are very necessary for all the trader. it help you to earn profit from the trading.

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  3. #742
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    Quote Originally Posted by faisal0 View Post
    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, if you have good money management they are very necessary for all the trader. it help you to earn profit from the trading.
    Always remember that these rules of risk and money management are a necessity for survival in Forex market. These rules are for the traders safety and guard against the margin calls. First you should not invest all your money for trading alone. Also it is important that a person will learn to lower his risk in trading.

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  4. #743
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    Quote Originally Posted by mmudssarhusen View Post
    Always remember that these rules of risk and money management are a necessity for survival in Forex market. These rules are for the traders safety and guard against the margin calls. First you should not invest all your money for trading alone. Also it is important that a person will learn to lower his risk in trading.
    Often traders turn too greedy while trading and theyare then not able to follow the rules of risk management properly. Looking for money is a good thing because that is the motivation for traders to work hard. But traders should have a risk management that will protect you against big losses. Discipline is the best medicine for greed that is a great cause of loss in trading.

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  5. #744
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    Quote Originally Posted by matfx View Post
    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.
    money management is key to success in your business , if you want to earn profit from your business then you need a good money management system . i like to follow the money management rule . it is very secure of our capital . we also need to trade according to our pips calculation. if you use this method then you earn good profit from it.

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  6. #745
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    money management is very important for all trader. If we can follow a good money management skill then we may be profitable in forex market. forex market will not always go in our favour and we need to keep our money if we want to survive in forex trading for long time. Taking more than 2% risk in a trade will not be a good idea in case of money management.

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  7. #746
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    Yes this is totally right that we can't earn money all the time in forex so many times will come when we will face loss that's why the importance of money management and risk management can be seen in forex market. Taking 2% risk per trade is a good formula and it can give us a good amount of margin to do trade in forex like 50 trades margin for our account.

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  8. #747
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    Quote Originally Posted by forexlearner View Post
    Yes this is totally right that we can't earn money all the time in forex so many times will come when we will face loss that's why the importance of money management and risk management can be seen in forex market. Taking 2% risk per trade is a good formula and it can give us a good amount of margin to do trade in forex like 50 trades margin for our account.
    It is a reality and not understand by few trader who want to get success with fast mean in this market our trade will give us good and bad results with our efforts if we perform better we have positive results and if not then we see negative results we have to make trade effectively with good trade ideas to perform and have own way to handle our results .

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  9. #748
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    Some other complex aspects of risk and money management are touched in this thread and I want to sincerely appreciate value traders for this but there is no point going for something complex in real live trading when there is other simple way of doing it to achieve better performance , left to me , I would prefer going by a fixed fraction of my capital in money management . That is what I have been using and it works well for me with mathematical precision. Suppose I have $1000 account , I do not risk more than 3% of my capital and that means my stop loss must not exceed $30 and based on this , it will be very unreasonable for me to trade with lot 0.01 which gives $1 per pip because 30 pips is not enough for my own trading style being a swing trader

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  10. #749
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    Forex is nice interesting online business in the the world. There are many trader are like different trading method for becomes success with Forex.to reduce the risk of loss of our capital money management knowledge in really a very important.They make emotional trade. As a result they face much loss. Forex is a very profitable business for us if we trade in rules.

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  11. #750
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    Quote Originally Posted by morshed naim View Post
    Forex is nice interesting online business in the the world. There are many trader are like different trading method for becomes success with Forex.to reduce the risk of loss of our capital money management knowledge in really a very important.They make emotional trade. As a result they face much loss. Forex is a very profitable business for us if we trade in rules.
    Money management is the most important part of Forex trading,the major reason why a lot of traders fail is simply because they do not pay too much attention to good money management when learning how to trade,the greed to make quick money has resulted in many failures.

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