Money Management help

Hello,

I use a commercial system which I won’t name (and yes I know I should learn how to trade rather than buying a system, I am learning and trying to find my own metods/edge), the advised MM system that comes with it is the basic 2% of bank which does have it’s drawbacks.

Recently I went through a 33% drawdown, painful, but I stuck with it and have been rewarded as yesterday I got back over the previous high-water mark, but to do that I had to make 67% back.

I’ve been reading Ryan Jones’ book and am having trouble thinking of how to apply the fixed ratio method.

Can anyone help me with some ideas for an alternative MM system please? Or at least give me some pointers of where to go and look.

Thanks

RT

anyone?

The concept of only risking 2% is ridiculously conservative. My opinion is that it originates from system sellers who hope you won't run out of capital before the money-back guarantee expires.

After all, 2% means you plan on allowing for 50 losers in a row and with that attitude, you're unlikely to succeed. More than 50, if you allow for diminishing contract size as your capital reduces...

Any normal trading strategy that allows for more than a few losers in a row is suspect.

Money management is necessary but no substitute for good trading. A perfectly profitable system will still produce losses if your psychology is not good. Most people rate a good system as the most important aspect of trading, second comes money management and last of all (if even considered) is psychology. The reality is that psychology is the most important - a good trader is one who has his or her psychology under control and has a subconscious success attitude. That's why a good trader with a poor system will always beat a poor trader with a good system.

A good trader is one who has the correct subconscious attitude - devoid of any self-destruct desires.

Black and white rules do not work in trading but all beginners demand them. However, they cannot follow them without correct psychology. To seek the wrong thing that you cannot follow even if you find it is not the path to profitable trading…

Thanks for taking the time to reply £10k trader but this isn't a question about psychology, i'm aware of the need to learn psychology and develop dicipline.

This question is about money management. I am not after black and white rules, I am after alternatives so that I can adapt them to suit my needs.

I understand that a perfectly profitable system will still produce losses if you have poor psychology, equally a perfectly profitable system will produce losses if you have poor money management.

My question still stands, if anyone can help it would be much appreciated.

£10kLoser said:

The concept of only risking 2% is ridiculously conservative. My opinion is that it originates from system sellers who hope you won't run out of capital before the money-back guarantee expires.

After all, 2% means you plan on allowing for 50 losers in a row and with that attitude, you're unlikely to succeed. More than 50, if you allow for diminishing contract size as your capital reduces...

Any normal trading strategy that allows for more than a few losers in a row is suspect.

Money management is necessary but no substitute for good trading. A perfectly profitable system will still produce losses if your psychology is not good. Most people rate a good system as the most important aspect of trading, second comes money management and last of all (if even considered) is psychology. The reality is that psychology is the most important - a good trader is one who has his or her psychology under control and has a subconscious success attitude. That's why a good trader with a poor system will always beat a poor trader with a good system.

A good trader is one who has the correct subconscious attitude - devoid of any self-destruct desires.

Black and white rules do not work in trading but all beginners demand them. However, they cannot follow them without correct psychology. To seek the wrong thing that you cannot follow even if you find it is not the path to profitable trading…

Click to expand...

Don't listen to this utter nonsense.

Trading is all about capital preservation. Losing 5-10% on a single trade is a sure fire way to blow up. Trading isn't about risking all to make a fortune - trading is about consistency and if you reach the day where it becomes your living then you can NEVER risk a blowup - otherwise you risk losing everything and having to get back in the job market.

You cannot guarantee under ANY circumstances that you won't have several losers in a row. Pyschology has nothing to do with it - it is an inevitable part of trading that losses will occur and you'll get it wrong several times over.

If you believe that you will never suffer numerous losses then you need to look at your own psychology because it appears you are far too overconfident in your own abilities.

Personally I always size the trades according to capital in the account regardless of what's just happened. Just because you've lost money on your last trade doesn't mean you are less likely to lose on the next one.

Rugby Trader said:

I’ve been reading Ryan Jones’ book and am having trouble thinking of how to apply the fixed ratio method.

Click to expand...

In Toni Turner's short term trading book, she suggests taking 10% of the profit from every winning trade out of the trading account. Is this what you mean by "the fixed ratio method"?

Having spent somwhere in excess of 4 years chart watching and trading I will share with you some cracking money management rules.

Firstly, most of the books on trading are for losers, risking 2% of your capital on any one trade is a sure fire way to stay in the game, that as a trader is your prime objective. But, like most things you can risk more than 2%, what you need to do is construct a risk tree based on certain factors.

1) Is the trade in the trend?
2) Is the trend just starting or has it moved a long distance?
3) Are you near a potential reaction zone going against your trade?
4) Whats the fundimental outlook, does it agree with your direction?
5) Is there big market changing direction news about to be released?


Add to this list as you see fit. Then build a score table to in effect rate a trade. So lets say that I gave 2 points for every correct answer and zero for a negative answer. I then kept a trading diary login all my trades and the results, were they positive or negative trades. After 100 or so trades you will have built up a great risk accessement table.

Using this you can rate your trades, high scoring trades you can risk more. 5% is possibly as far as you should go, remember 5% risk will mean 20 trades and you are out. If you trade 2% then its 50 trades. Its not that simple really as everytime you lose money your capital goes down so you risk less. When you make money your capital goes up so you are in effect risking more. Trading as a % of your capital will ensure when you are doing well you are increaseing the amount you trade and when you are doing badly you are decreasing the amount you trade.

I hope this helps.


All the best


Mike

NewThought said:

In Toni Turner's short term trading book, she suggests taking 10% of the profit from every winning trade out of the trading account. Is this what you mean by "the fixed ratio method"?

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no, it's a way of working out how much you should be staking depending on how much you are making in pure profit. i'm trying to get my head round it but finding it a bit difficult relating it to spreadbetting, but i think i'm nearly there.

Take your account balance and divide in by 50 then risk 2% per trade.

How to risk 2% per trade?

Take the entry place and subtract the stop level and you have a number of points, divide that into the 2% and you have the amount of shares to trade, or points if spread betting per point.

if you then lose your next trade will also be at 2% BUT from your new account balance therefore it will be slighly less than the previous trade was a winner, or breakeven trade.

Risk more than 2% per trade and unless you really know what you're doing the poor house is probably your next stop.

Risk more than 5% and the poor house will be your next stop. But it might not be today, tomorrow, or even within the next year - but however long it takes the poor house will be your destination.

Yes, always exceptions to the rule but not many because this game at it's heart is a risk/adjusted one.

Good luck anyway.

Hi R.T.

Good to see that your intellectual trading curiosity has moved past a simple trading strat. Not sure what you're looking for tbh as the answer is fairly obvious and doesn't have to be/shouldn't be complicated, in fact sound MM is one of the simplest issues of trading to get right from day one, if you're disciplined, but here's a few thoughts; firstly, if you've lost 30%+ of a v. small account, whilst still in the experimental stage, then that's fine and dare I say it quite *normal*. Heh, looking back I've lost 100% of accounts several times starting out, but wtf, they were (iirc) 100 quid, 300 quid, 500 quid..whilst learning on the job. If you've lost 37% and then re-couped 60%+ very quickly then you're either still playing with toy money, or trading very recklessly...

However, if you've moved up to proper 'trading' then exercising sound MM is absolutely essential and tbh dead simple as Hoggums has pointed out. IMHO you should never risk more than 2% of your account on any given forex trade, in fact I'd suggest a slightly different approach; you should only risk 2% by having two trades current (1% on each) which should in theory increase the probs if you choose your correlations carefully..

WRT the psyche issues mentioned yep it's a massive issue, but in my experience nothing fooks with your head more than reckless trading based on too much exposure on a single trade..so keep your MM simple and within your own losing comfort zone/pain threshold. You may decide that 6% loss per day day trading is enough, you may decide that you day trade from 8-5 on 2 pairs and you take all the trades based on your strat for that day even if the loss slightly exceeds that ceiling (temporarily or eod). You may decide that 6 losses in a row is time to call it a day...only you can set those paramaters.

What many point to is the kinda bizarre satisfaction of taking a loss based on the plan, in my own experience if I've lost a few percent in a day, but have stuck to the plan rigidly and believe the next day the plan will work, then it doesn't hurt anywhere close to the early days when I had no personal terms of reference/set of rules...and honestly I don't know any other way to trade other than having a mechanical plan based firstly on one set of entry paramaters and a series for exit.

Hope some of this is useful...

You guys suggesting risking 2% - do you mean 2% of original equity, or 2% of equity at trade time?

Dommo said:

You guys suggesting risking 2% - do you mean 2% of original equity, or 2% of equity at trade time?

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2% of current equity.

At 2% of current equity, how many losers in a row does it take take to reach ruin?

Dommo said:

how many losers in a row does it take to reach ruin?

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Remarkably, the answer is just two:

How just two losers in a row can lead to ruin

thanks for the help guys, some stuff to think over and plenty more research to do!

Black Swan - it is a relatively small account, the actual reason i had such a big dip and big recovery is because i've been staking 5%, takes you on a rollercoaster ride for sure but i'll be dropping my stakes down to 2% as I want to turn that small bank into a much bigger bank, even if it takes me a couple of years or more to do that.

Still using that system as it is working for me, however still reading, learning, paper-trading and also trading 3 ducks (my own version of) on 10p stakes on a separate account. I've got many years of this before I can consider myself out of nursery probably.

I'm reading over some of the articles on here with regards to trading plans as well, so going to have my trading methods documented.

Here's to learning more!

Dommo said:

Remarkably, the answer is just two:

How just two losers in a row can lead to ruin

Click to expand...

ha!
definitely.

Rugby Trader said:

thanks for the help guys, some stuff to think over and plenty more research to do!

Black Swan - it is a relatively small account, the actual reason i had such a big dip and big recovery is because i've been staking 5%, takes you on a rollercoaster ride for sure but i'll be dropping my stakes down to 2% as I want to turn that small bank into a much bigger bank, even if it takes me a couple of years or more to do that.

Still using that system as it is working for me, however still reading, learning, paper-trading and also trading 3 ducks (my own version of) on 10p stakes on a separate account. I've got many years of this before I can consider myself out of nursery probably.

I'm reading over some of the articles on here with regards to trading plans as well, so going to have my trading methods documented.

Here's to learning more!

Click to expand...

Good man, I swing most of the majors and day trade 2 Euro pairs. Day trading (on a bad day) I can have, for example, 8 losers 4 winners and only lose approx. 2-3% of the day trading account (based on one percent risk per trade). On that basis I'd need a very bad run of results to lose a lot of equity...I used to think psyche was everything but it's MM, MM, MM...which helps construct a healthy trading psyche...

I am not sure how would you use the 2% rule.
let say you you have $100,000. I use 25% stop loss on stock and 50% stop loss on option
example: buy $8000 of any stock and stop at 25% of $8000 or $2000
or buy $4000 of any option and put 50% stop loss of $4000 or $2000.
email me at [email protected] if you want more detail.

The maths presented on successive losing trades is misleading. If you have $100k and bet $2k per trade, then sure, 50 losing trades in a row wipes you out.

But that's not the way it works. What is far more common is 2 winners followed by 3 losers, then 1 winner then 2 losers, etc.. i.e. equity curve always sloping downward.

I've done some backtesting on strategies which reduce risk when they are losing money (e.g. go from 2 pct/trade to 1 pct/trade) and they nearly always take longer to recover than those where you just stick with the 2 pct through the bad times. In other words, reducing risk when you're in a hole is MATHEMATICALLY not the right thing to do (provided your system has positive expectancy).

In fact, fairly simple backtesting will show that many aspects which the majority find uncomfortable (quickly cutting losing trades, running winning trades, putting up with large numbers of sequential losses [that's the one I struggle with]) produce the most profitable systems, measured by return divided by drawdown.

Funny old world innit

meanreversion said:

The maths presented on successive losing trades is misleading. If you have $100k and bet $2k per trade, then sure, 50 losing trades in a row wipes you out.

But that's not the way it works. What is far more common is 2 winners followed by 3 losers, then 1 winner then 2 losers, etc.. i.e. equity curve always sloping downward.

I've done some backtesting on strategies which reduce risk when they are losing money (e.g. go from 2 pct/trade to 1 pct/trade) and they nearly always take longer to recover than those where you just stick with the 2 pct through the bad times. In other words, reducing risk when you're in a hole is MATHEMATICALLY not the right thing to do (provided your system has positive expectancy).

In fact, fairly simple backtesting will show that many aspects which the majority find uncomfortable (quickly cutting losing trades, running winning trades, putting up with large numbers of sequential losses [that's the one I struggle with]) produce the most profitable systems, measured by return divided by drawdown.

Funny old world innit

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Agreed. One big factor is whether you seek to jump on trends or fade the market (ie whether you believe you are entering after or before a local max/min). I would hazard a guess that the majority of retail traders follow trends.

Its impossible to state a working general rule about stoplosses/drawdown - it depends on the strategy and the characteristics of the particular market over the period the rule is in use. Past data may inform you, and of course it may mislead.

If you trade single trades serially, and stop out at 2% of running equity (rather than 2% of initial equity), it takes very many losses to reach ruin (I would say an infinite number, but for minimum trading levels). Of course in practice, if you reach some very small fraction of initial equity, you stop, or recapitalise.