Money management in a nutshell. Part 2 - Page 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. @Jamuna money management is a tool which backs your strengths or you can say if you are weak in analysing then money management always help to find out such trades that really can cover your weak points because when you are loosing and whatever methods you are using you will find one or two trades that completely change the scenario of your account and that is why a weak trader can do wonders if one has make full use of money management techniques.

regards

3. The role of the money management is very important in the trading because if we mange the risk well and save our investment in the trading then we can be able to make the success in the forex trading business so the need is that we mange the investment and avoid the high risk in the trading.

4. on working of the loose on priors by the entrance on having of the good expense on attracting/advertising moments on further of challanging the nuance as altering of the better on earning by the decision on committing of a good exchange by the arbitraging of options with the good scenes of the market.

5. I often do this while I made good profits and the stop is not too far and its fixed ratio. My strength often is I dont carry forward trade too many times and when I realize that position is losing the momentum I manually close the trade within first half an hour of opening the position and this has given me full freedom and liberty of ease off emotion factor of the mind and benefit of using earlier profits in proportion to put it onlind to earn more.

6. 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.

7. 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 w will be able to make good money becasue when we use it tere is more chance of making making profit tan loss so we must use it.

8. money management is very essential for a trading plan. without this system, you have not able to survive the market volatile condition. its a major part of the trading plan, or strategy are not give any grantee on our own ideas, analysis, or trading system. but one good money management system is very much help to you survive easily from the market volatile.we must be do mistake when we do the trade, but with money management we face less loss .

9. Originally Posted by asi00
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 w will be able to make good money becasue when we use it tere is more chance of making making profit tan loss so we must use it.
I am disagree with you. Money management is not system or strategy in trading, there are big difference between system and money management. Money management is part of system, in money management will manage about how many lot size to use in each transaction, using which leverage, target profit and loss to tolerance in each transaction, how many transactions in a time for trading and anything which had connection with your capital for trading. And strategy of trading has relationship with pair to use, which indicator or price action or any analysis to make for opening and closing position, and which session is the best time to run the strategy.

10. With the help of fixed ratio view about definition of money management it is such as good play as good strategy for traders. Sometime traders are operate this business but they can not make their money management. For this reason sometime traders are fall in loss. For me it is such a good system to develop my business through a good money management.

11. Originally Posted by andry777
I am disagree with you. Money management is not system or strategy in trading, there are big difference between system and money management. Money management is part of system, in money management will manage about how many lot size to use in each transaction, using which leverage, target profit and loss to tolerance in each transaction, how many transactions in a time for trading and anything which had connection with your capital for trading. And strategy of trading has relationship with pair to use, which indicator or price action or any analysis to make for opening and closing position, and which session is the best time to run the strategy.
I would say that the money management is the personal capability to operate with our own capital or with the capital of some investor. This would be the capability to be good manager. We have to be very good financial manager. Because we are operating with financial resorches. We need to be very and very good operators of our personal financial capital.

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