# 3 Money Management Questions

#### kako

##### Active member
Hi

0 - I've read many of this forum's(risk and money management) threads. and i've to thank to all contributors.
i've used a tweaked martingale MM method(not the crazy double up on each loss :| ) for a while and i found that many of veteran traders who said: "Martingale MM followers are doomed to lose their whole account sooner or later; it's only a matter of time" are right. . actually martingale doesn't work because nothing is impossible in the market, even a 15 losing streak(consecutive loss). i've seen it with my two eyes that after 3 yrs, mkt proved me to be wrong in ASSUMING, a 15 losing streak is impossible with my precisely backtested strategy.
actually the problem of martingale method is: it assumes dependency between trades, and it's wrong to assume individual trades has any kind of dependency between em.

ok, this was story of losers. let's look for better ways of MM(=money management) which protects the capital in first place. :cheesy:

1- i have to use a Technical or anything else(astronomy maybe) etc ... tool to trade, which supposed to give me an edge in predicting which trades worth taking. then risk a tiny bit of account(say 1% of capital) on every trade(fixed fractional method). the problem is deciding abt n%.
as i read past posts, n% have to be calculated from the max DD(=Drag Down) in the past results in a considerable period. right?
monte carlo simulation is a way of deterimining this ratio right? could u pls provide a practical preferable free tool to do this simulation? or introduce me to formulas of this method to make me enable to apply them in an Excel of VB script.

this was first question of me(monte carlo practical resources for reading/applying it).

ok here's the next:

2- if we have a system with R = (No. Win / No. loss) and W = (Avg.Win / Avg.loss)
am i right in writing this:

E(efficiency of system) = R * W - 1

if we assume trading randomly(based on tossing a coin) in a random mkt with R:R = 1:1 ( say using T/P = 23 pip and S/L = 20 pip. on Eur with 3 pip spread), then E = 0.

am i right or not? this is my second question. i ask this because i've read some other calculations(say kelly's factor) which differs a bit with my calculation.
does E can give a hint to "what Fixed Fraction" (n%) to use?

3- my final question is: is it necessary to have positive Pips in the end of a period to make profit on that period?
i mean some MM gurus say: NO! absolutly not! u have to risk more on winning positions . ok true. but how could some1 know this special trade is going to be winning? it's kind of assumtion and i think it's not rational. some ppl say check ur trade's set-up with a higher TF(=Time Frame) and if it was in favor of higher TF trend, then risk more on it.
i mean is this all which is to Size management? to FEEL which trade is going to be winning and risk more on it?
am i right in saying that, with fixed fraction MM methods, 1 have to have positive pips(say in a month) to make profit on that month?

i found this forum very valuable, but somehow forgotten . hope this questions could bring up some light and heat.
kako

KOKO ,

Thanks for the invite and the private message .

Quote " i've used a tweaked martingale MM method(not the crazy double up on each loss :| ) for a while and i found that many of veteran traders who said: "Martingale MM followers are doomed to lose their whole account sooner or later; it's only a matter of time" are right. . actually martingale doesn't work because nothing is impossible in the market, even a 15 losing streak(consecutive loss). i've seen it with my two eyes that after 3 yrs, mkt proved me to be wrong in ASSUMING, a 15 losing streak is impossible with my precisely backtested strategy.
actually the problem of martingale method is: it assumes dependency between trades, and it's wrong to assume individual trades has any kind of dependency between em. "

Martingle method is for the traders with ZERO edge in the market . This techniques is best for casino goers. This is the gambler's method and traders should avoid this at all times. No arguments no discussions .. It is a mathematical Fact .. ( what about if Mr Joe Blogg in his "Secret of becoming a milionaire" said use Martingle method ?
Answer :- Bin his book )

Anti maringle is for traders who KNOW they have an edge and let their trading edge to kick in the long run .

Quote " 1- i have to use a Technical or anything else(astronomy maybe) etc ... tool to trade, which supposed to give me an edge in predicting which trades worth taking. then risk a tiny bit of account(say 1% of capital) on every trade(fixed fractional method). the problem is deciding abt n%.
as i read past posts, n% have to be calculated from the max DD(=Drag Down) in the past results in a considerable period. right?
monte carlo simulation is a way of deterimining this ratio right? could u pls provide a practical preferable free tool to do this simulation? or introduce me to formulas of this method to make me enable to apply them in an Excel of VB script.

this was first question of me(monte carlo practical resources for reading/applying it). "

I have already posted the required Monte carlo simulation on this site. Please search for it .If not found then let me know I try to find it as it is on my other computer in the office .

Can I suggest to start with Risk management before getting involved with money management ..

Grey 1

.

grey1

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KAKO ..

Just one important note on Monte carlo simulation .

The Monte carlo simulation assumes that data are stationary for the sake of simplicity . Stock market data is of Non Stationary type and you would need FT technique to isolate the stationary data from the non stationary type before you run the simulation .

If I was you , I would just run the simulation to get a rough idea about your max DD but would not bet my farm on it .

.

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]In the example below.. The trading Engine is confirming if Trader would like to take a trade knowing that there is 7% Risk of loss.. Now, if you did not know the risk associated with this trade then how would you know how much of your total capital you should use ( Money managment ). Of course if there was Zero risk then you would bet your house on it .

Our trader should concentrate on understanding the Risk managment before position Sizing ..

Grey 1

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Grey1 said:
KOKO ,

Thanks for the invite and the private message .

Quote " i've used a tweaked martingale MM method(not the crazy double up on each loss :| ) for a while and i found that many of veteran traders who said: "Martingale MM followers are doomed to lose their whole account sooner or later; it's only a matter of time" are right. . actually martingale doesn't work because nothing is impossible in the market, even a 15 losing streak(consecutive loss). i've seen it with my two eyes that after 3 yrs, mkt proved me to be wrong in ASSUMING, a 15 losing streak is impossible with my precisely backtested strategy.
actually the problem of martingale method is: it assumes dependency between trades, and it's wrong to assume individual trades has any kind of dependency between em. "

Martingle method is for the traders with ZERO edge in the market . This techniques is best for casino goers. This is the gambler's method and traders should avoid this at all times. No arguments no discussions .. It is a mathematical Fact .. ( what about if Mr Joe Blogg in his "Secret of becoming a milionaire" said use Martingle method ?
Answer :- Bin his book )

Anti maringle is for traders who KNOW they have an edge and let their trading edge to kick in the long run .

Quote " 1- i have to use a Technical or anything else(astronomy maybe) etc ... tool to trade, which supposed to give me an edge in predicting which trades worth taking. then risk a tiny bit of account(say 1% of capital) on every trade(fixed fractional method). the problem is deciding abt n%.
as i read past posts, n% have to be calculated from the max DD(=Drag Down) in the past results in a considerable period. right?
monte carlo simulation is a way of deterimining this ratio right? could u pls provide a practical preferable free tool to do this simulation? or introduce me to formulas of this method to make me enable to apply them in an Excel of VB script.

this was first question of me(monte carlo practical resources for reading/applying it). "

I have already posted the required Monte carlo simulation on this site. Please search for it .If not found then let me know I try to find it as it is on my other computer in the office .

Can I suggest to start with Risk management before getting involved with money management ..

Grey 1

.

grey1
You are quite right Grey 1.

Risk is the opposite of certainty, or very near certainty.

Its evaluation is not so much a matter of mathematical calculation, but a matter of individual skill. The higher developed the individual skill level, the lower the risk, the lower the skill level, the higher the risk.

No skill level at all, everything is consequently heavily risk orientated, got to be.

Money management is but an extension of a higher skill level.

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Hi

thnx for the replies Grey1 and Socrates.

i'm trading fx, and that's why i'm not familiar with volume related stuff like VWAP which i'm seeing it's name more and more here on T2W thnx to Grey1's gr8 contribution. i'm keen to learn and will read it, but i think it's not of much use for fx, am i wrong?

Stock market data is of Non Stationary type and you would need FT technique to isolate the stationary data from the non stationary type before you run the simulation
i c. yes. i've used this monte carlo simulator for getting a rough idea about worse possible case with my trading charactristics(Winning ratio & R:R) and also have seen ur monte carlo spread sheet grey1(they're somehow the same i suppose?).
but frankly speaking, ur sentence quoted is above my head. could u please kindly give more explanation of this? what is FT stands for?

another question: assume
probability of Win = Pw = Now / Nototal
probability of loss = PL = NoL / Nototal
W = Now / NoL
R = Reward:Risk = Avg w / Avg L
Avg w = Sum of Wins / Now
Avg L = Sum of Loss/ NoL

Kelly Value =Pw - ( PL / R )

first question: is all above calculations are right? pls correct me if i'm mistaken. (i'm in doubt here:Avg w = Sum of Wins / Now isn't Now should be Nototal ??)

ok main question: i've analysed my track record and my results are :
Avg Win / Avg Loss = 0.97
Winning Probability = 58%

it's not really good result i know, but it's better than random right?(E>0). tho fx is not an easy mkt.
with entering these values in the simulator in the link above, i get a kelly value of 0.1470 and a not so good result in simulation.

my trading set-up is a trend-following, detecting trend in working timeframe and enter on pullbacks(with an overbought/oversold indicator). with a stop in 15-20 pip and a conservative MM which results into many breakevens and many trail stops hit just because of market noise.

what do u suggest? to leave the fx and concentrate on futures/indexes/stocks using VWAP and other technical tools which gives an edge? i ask this because i've tested many strategies, precisely(with MATLAB software), used many different MM rules, Fixed Fractionals, different martingale methods, etc. but i still lack an edge in my trading fx. my guess is that other instruments maybe easier to trade with less chaotic behavior. :|

Regards
.........................................
Yaser

Ps. Socrates, ur posts are very comples to understand

Quote " what is FT stands for? "

Quote "first question: is all above calculations are right? pls correct me if i'm mistaken. (i'm in doubt here:Avg w = Sum of Wins / Now isn't Now should be Nototal ??)"

Answer :-- No of win is correct

Quote " ok main question: i've analysed my track record and my results are :
Avg Win / Avg Loss = 0.97
Winning Probability = 58% "

Answer :-- 8% is a good edge . with all respect I doubt if the edge is there ( could be there in a simulated environment ..)

Quote " my trading set-up is a trend-following, detecting trend in working timeframe and enter on pullbacks(with an overbought/oversold indicator). with a stop in 15-20 pip and a conservative MM which results into many breakevens and many trail stops hit just because of market noise.

Answer :- This is an excellent directional methodology provided

1) your OB/OS indicators does not use an arbitrary number to measure the OB/OS cycle . In another word if you are using RSI or similar then you are not really getting the correct signal as RSI assumes the chart is going through an OB/OS cycle every 14 units. This assumption is raw and not valid ..

2) you understand about TREND BIRTH .. A trend birth is when trend starts in smaller time frames and then propagates to higher time frame . In another word if you trading in 5 min time frame you should look for tell tale signs of birth trend in 1 min time frame .

Quote " what do u suggest? to leave the fx and concentrate on futures/indexes/stocks using VWAP and other technical tools which gives an edge? i ask this because i've tested many strategies, precisely(with MATLAB software), used many different MM rules, Fixed Fractionals, different martingale methods, etc. but i still lack an edge in my trading fx. my guess is that other instruments maybe easier to trade with less chaotic behavior. :| "

No donot leave FX.. Sky is the same colour where ever you go . Learn more about various ANALYSIS techniques by those professional traders onthis BB and even better find some one who lives off of his trading than coaching .. Avoid all coaches at all times . They are failed traders.

Grey 1

thnx again for ur reply grey1. i really appreciate ur post.

8% is a good edge . with all respect I doubt if the edge is there ( could be there in a simulated environment ..)
nop, this is the results of real money trading of my semi-discritionary trading strategy. it's not a very long run though, and i'm updating the results per week(for size adjustment's sake). anyway it may change in the future, i hope toward north direction.

your OB/OS indicators does not use an arbitrary number to measure the OB/OS cycle . In another word if you are using RSI or similar then you are not really getting the correct signal as RSI assumes the chart is going through an OB/OS cycle every 14 units. This assumption is raw and not valid
nop. i don't use RSI or Stoch as O/B O/S indicator. my tool is a freely avail indicator for metatrader. an oscilator named: J_TPO( a picture is attached). it has better behavior imo, than other oscilators who over bought/over sold very quickly with a tiny move(Stoch), or is lazy in moving(lagging a lot) like RSI.
i trade it's hooks(coming back from o/b o/s areas = 0.8 ~ 0.9 on the indicator.
not every hook tho, only those who are a certain pullback on an definite trend(which i detected and chasing from b4).

you understand about TREND BIRTH .. A trend birth is when trend starts in smaller time frames and then propagates to higher time frame . In another word if you trading in 5 min time frame you should look for tell tale signs of birth trend in 1 min time frame .
seems quite a new concept to me. although very interesting in terms of market depth. i've seen this concept on your previous posts too, and will appreciate if you could introduce a thread which contains explanations on this concept, here.
sorry, but don't think searching may give me a hint, because there isn't a keyword which i could search for, tho asking u, if remembering any related thread to this concept.

thnx again.

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