Money management in a nutshell. Part 2

# Thread: Money management in a nutshell. Part 2

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

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»

2. 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...

3. Originally Posted by rinaji
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.

4. Originally Posted by Quid
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.
yes dear I am very careful about my position always so always I avoid the risk for my position and I calculate my profit loss. and it is very simple because there is many way for calculation but our success depend on our pure measurement and analysis. so every position can be loss but we should to be serious about our loss ratio.

5. Originally Posted by rinaji
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.

6. This is the main part of money management in forex, robot or binery the good money management is very important in our personal trading job but we should be interested in the formula that you gave for this method the traders with simple money managment to calculate the risk,or maybe much more learning about this method from the book, i will not talk too much about it in my personal opinion

7. [lang=id]i guess, i always set it to follow the equity i have had in balance, and if i can make some profit and balance grows, so with automatically i always set or increase it , this is the way to maximize my profit, and of course, the risk is increased at the same time[/lang]

8. Originally Posted by rinaji
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...
I've been working with the Strategy Tester in MT5 using the HedgePro symbols at RoboForex. I've found the 1 minute OHLC data only goes back to November 2012. The history quality declines with earlier dates. I would use the Metaquotes server but they don't have the HedgePro symbolsWell 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

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Originally Posted by rinaji
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...
Greed is actually temptation to acheive high and higher profits through any right or wrong in forex, this can be harmful not only for yourself but for greedy traders are actually harmful for forex as well other traders.
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

9. Originally Posted by skrill
I've been working with the Strategy Tester in MT5 using the HedgePro symbols at RoboForex. I've found the 1 minute OHLC data only goes back to November 2012. The history quality declines with earlier dates. I would use the Metaquotes server but they don't have the HedgePro symbolsWell 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

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Greed is actually temptation to acheive high and higher profits through any right or wrong in forex, this can be harmful not only for yourself but for greedy traders are actually harmful for forex as well other traders.
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
Trading should never be driven by temptation or greed but based on rational decisions. I would say Forex is not that hard and is also very interesting business.In my view the main thing is we should learn to manage the losses here and keep it as low as possible then success will automatically follow us in this business.

10. Originally Posted by forexfighter007
Trading should never be driven by temptation or greed but based on rational decisions. I would say Forex is not that hard and is also very interesting business.In my view the main thing is we should learn to manage the losses here and keep it as low as possible then success will automatically follow us in this business.
Forex is a interesting business if we can learn certain things here. I do not lose my confidence even if i make a lot of losses because i have made many profits before so i can make it but these losses may caused by temporary conditions in the market , so when i make losses i analyze the causes of the losses and try to correct the mistakes that caused these losses to win the next trade

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