Money management in a nutshell. Part 2 - Page 78

# Thread: Money management in a nutshell. Part 2

1. ## 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»

2. The use of stop loss remains unavoidable in trading if any forex trader desires staying long in trading business because that is the only things that keeps a trader going in the face of challenges which can not but come occasionally . Proper risk and money management is very vital to trader's success in forex and that is what differentiates experienced traders from the newbie . One of the way to effect proper risk and money management is the good use of stop loss, I have to say good use of stop loss because so many traders use stop loss to their own undoing .

3. Originally Posted by layigold
I have to say good use of stop loss because so many traders use stop loss to their own undoing .
What kind of stop loss which are used to their own undoing? Indeed we can't avoid losses in forex, if we don't want to accept losses, then we are not a real businessman or trader, there is always a risk in all businesses, this is forex trading, many people say that this is the most risky business, although I don't know that it is true, Let's just say this is true, then risk management is very important in this most risky business.

4. Originally Posted by AmitChallenger
Yes many of us dont maintain to trade with our plans and proper logic and that is how severe problems start to creep in. Due to greed even some experienced traders dont follow risk management and suffering loses. It is prudent for newbies to exercise caution while trading. Managerial skills are very important and so we should learn and achieve them.
Yes that right , and that is why money Management is really important in forex business but many traders who do not care about money management until their account often fail to survive.

Therefore money management practice can be started from a demo account until the moment of enter in the real account of the application of money management has become a habit that can make traders minimize the possibility of failure

So for me the use of money management to be the determinant of the success of trading account to survive from high risk of forex business, for traders who ignore the importance of money management then I am sure will get a big loss repeatedly to get bankruptcy.

5. Originally Posted by ara
What kind of stop loss which are used to their own undoing? Indeed we can't avoid losses in forex, if we don't want to accept losses, then we are not a real businessman or trader, there is always a risk in all businesses, this is forex trading, many people say that this is the most risky business, although I don't know that it is true, Let's just say this is true, then risk management is very important in this most risky business.
You are right a mature trader will know the need of accepting losses and the need to keep the risks under limits. That is the big mistake that often traders do, they think taking high risks will help them earn faster. Risk management is surviving tool and also the success key. It is true that greed will not allow us to follow risk or money management.

6. Money management is one the most successful strategies that can be very effective specially when we have to trade.in the right way .for the divide of the capital I think this can be very effective method .but the thing which can disturbe the trader to use the good money management .is the having for over trades .I for me I see that over trading is a problem .without money management will lead destroy the balance .

7. Money management is one of the most successful strategies which is very vital for the balance to continue .see some traders who trade without a correct money management .they faces some problems .in times of reversing markets .thus theire accounts might will be in danger .and the reason is non study the capital and the general volume lot size ..the more we plan good money management the more we are safe.

8. What is the best alternative for a trader is: he must try to perform necessary money management process here. Otherwise it can possess greater trading risks that he can’t ensure right utilization of his funds here. Yes, all over again, a trader can enjoy full access to use any trading facility as all brokers are now trying to fulfill the demands of their diverse clients by ensuring flexible and customized trading packages here.

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