Larry Williams Money Management Technique

[Fran8]

Hi Everyone,

Please help with Money Management for Larry Williams

First thanks for your good job on helping people,

I bought and read your book “The Right Stock at the Right Time”. I mainly trade stocks and when I trade commodities I do it through ETF.

I really liked the book specially the part on money management since I have found precisely the point that you make, I’m not able to grow my account because of the dumb goblin that you talk about in one of your Seminars.

Management System recommend is:

(balance x risk percent)/ Largest Lost = contracts or shares.

Then you recommend using a risk percent 10 to 15% of your balance divided by the largest loss or loss you are willing to take.

Let’s say that we have an account Balance of 10,000 USD and we will like to risk 15% so 1,500 USD and we only are willing to accept as our largest lost 2% of the account or 200 USD.

(10,000 x 15%)/200 = 7.5 shares if the price of the stock is 20 that means that you are expending excluding commission 150 USD which is 1.5% of you total balance.

My question is how is possible to grow the account like that, also it does not matter if you tweak the largest lost you will have a very small % of your total account on each trade almost insignificant!!!!!

What I’m getting wrong

Also like I mention to be careful because if you risk 20% and loose 3 times in a row that will be a 60%. But you will only risk 20% of your account in case that in the formula you do not divide by the largest loss or the loss that you are willing to take, if you divide by the largest lost the number or shares will always be so small that your total exposure is so small that is impossible that creates a positive or negative impact

Please help, I’m sure that I got something wrong but I do not know where

Thanks
Kind regards

 

[Brumby]

Hi Everyone,

Please help with Money Management for Larry Williams

First thanks for your good job on helping people,

I bought and read your book “The Right Stock at the Right Time”. I mainly trade stocks and when I trade commodities I do it through ETF.

I really liked the book specially the part on money management since I have found precisely the point that you make, I’m not able to grow my account because of the dumb goblin that you talk about in one of your Seminars.

Management System recommend is:

(balance x risk percent)/ Largest Lost = contracts or shares.

Then you recommend using a risk percent 10 to 15% of your balance divided by the largest loss or loss you are willing to take.

Let’s say that we have an account Balance of 10,000 USD and we will like to risk 15% so 1,500 USD and we only are willing to accept as our largest lost 2% of the account or 200 USD.

(10,000 x 15%)/200 = 7.5 shares if the price of the stock is 20 that means that you are expending excluding commission 150 USD which is 1.5% of you total balance.

My question is how is possible to grow the account like that, also it does not matter if you tweak the largest lost you will have a very small % of your total account on each trade almost insignificant!!!!!

What I’m getting wrong

Also like I mention to be careful because if you risk 20% and loose 3 times in a row that will be a 60%. But you will only risk 20% of your account in case that in the formula you do not divide by the largest loss or the loss that you are willing to take, if you divide by the largest lost the number or shares will always be so small that your total exposure is so small that is impossible that creates a positive or negative impact

Please help, I’m sure that I got something wrong but I do not know where

Thanks
Kind regards

This is my understanding. The money management technique as used by Larry William is very aggressive. It allows a trader to accumulate contracts relatively quickly and in the process earning geometric profits. It is generally believed to be the main contributor on how he managed to turn $10,000 into $1.1 million in 12 months during the world trading championship.

Essentially it is a fixed percentage risk limited by largest loss. As the account balance grows, the dollar risk per trade needs to be recalculated. The dollar risk is then divided by the largest loss to determine the number of contracts you can trade. This money management approach requires a relatively large account unless the largest loss is relatively small or the percentage risk is relatively large. This approach also has significant drawdown as demonstrated in his trades during the world trading championship.

Below is an analysis of the Williams MM technique and how quickly contracts can be increased as the account balance grows (Source: The Universal Principles of successful investing by Brent Penfold)

[/IMG]

 

[Fran8]

This is my understanding. The money management technique as used by Larry William is very aggressive. It allows a trader to accumulate contracts relatively quickly and in the process earning geometric profits. It is generally believed to be the main contributor on how he managed to turn $10,000 into $1.1 million in 12 months during the world trading championship.

Essentially it is a fixed percentage risk limited by largest loss. As the account balance grows, the dollar risk per trade needs to be recalculated. The dollar risk is then divided by the largest loss to determine the number of contracts you can trade. This money management approach requires a relatively large account unless the largest loss is relatively small or the percentage risk is relatively large. This approach also has significant drawdown as demonstrated in his trades during the world trading championship.

But if you see my example

(10,000 x 15%)/200 = 7.5 shares if the price of the stock is 20 that means that you are expending excluding commission 150 USD which is 1.5% of you total balance.

The amount of the total balance will be so small that how can you grow the account?
in my example I use the satandard 2% loss that is very small and look how small the positions will be

 

[jjames69]

But if you see my example

(10,000 x 15%)/200 = 7.5 shares if the price of the stock is 20 that means that you are expending excluding commission 150 USD which is 1.5% of you total balance.

The amount of the total balance will be so small that how can you grow the account?
in my example I use the satandard 2% loss that is very small and look how small the positions will be

that mm plan is very standard. to grow your account you'll need to trade several times a month. each correct trade should give you double the amount of gains compared to a loss, a 2:1 reward to risk ratio. so if you can get 1 correct trade per week, and your gain is 4% compared to a 2% loss, then at the end of the month your account should increase by @ 16%.

 

[Fran8]

that mm plan is very standard. to grow your account you'll need to trade several times a month. each correct trade should give you double the amount of gains compared to a loss, a 2:1 reward to risk ratio. so if you can get 1 correct trade per week, and your gain is 4% compared to a 2% loss, then at the end of the month your account should increase by @ 16%.

So the formula is correct

(Account Balance x Percent Risk)/Maximum Drawdown or Maximum Acceptable loss = Contract or shares to trade

Please remember that I trade shares a 4% of the whole account balance means that I would have to make more than double the money on the trade just to earn 4% of my total balance

Balance = 10,000
Percent Risk 10-15% - what he recommends
Maximum Acceptable Loss = 200

(10,000 x 15%)/200 = 7.5 shares to trade

Stock Purchase Price = 20

Total balance on the trade = 7.5 x 20 = 150 / by account balance = 0.015% of the account

To get the 4% that you mention I will need to make a 400% on the trade

That is what I mean with id does not sound realistic

 

[jjames69]

So the formula is correct

(Account Balance x Percent Risk)/Maximum Drawdown or Maximum Acceptable loss = Contract or shares to trade

Please remember that I trade shares a 4% of the whole account balance means that I would have to make more than double the money on the trade just to earn 4% of my total balance

Balance = 10,000
Percent Risk 10-15% - what he recommends
Maximum Acceptable Loss = 200

(10,000 x 15%)/200 = 7.5 shares to trade

Stock Purchase Price = 20

Total balance on the trade = 7.5 x 20 = 150 / by account balance = 0.015% of the account

To get the 4% that you mention I will need to make a 400% on the trade

That is what I mean with id does not sound realistic

his formula seems dependent on a particular trading style.

in laymens terms.............

traders rules of thumb, never risk more than 1-2% of your total account per trade.

example - if you have a $100,000 account and buy x shares of apple worth $20,000(this amount is irrelevant), you want to have stops in place so you if the trade goes the other way, you lose $1000-2000 max. on the other hand, if the trade is successful you want to make $2000-4000. so if you could net one successful trade per week, at the end of the year you'd be looking pretty good.

 

[Brumby]

So the formula is correct

(Account Balance x Percent Risk)/Maximum Drawdown or Maximum Acceptable loss = Contract or shares to trade

Please remember that I trade shares a 4% of the whole account balance means that I would have to make more than double the money on the trade just to earn 4% of my total balance

Balance = 10,000
Percent Risk 10-15% - what he recommends
Maximum Acceptable Loss = 200

(10,000 x 15%)/200 = 7.5 shares to trade

Stock Purchase Price = 20

Total balance on the trade = 7.5 x 20 = 150 / by account balance = 0.015% of the account

To get the 4% that you mention I will need to make a 400% on the trade

That is what I mean with id does not sound realistic

The primary problem IMO is that you are approaching it as a mathematical rather than as a position sizing issue. Secondly, you are conflating risk, position sizing (the focus of the method) with profit potential.

The premise of the method is that the position sizing is a function of risk per trade but limited to largest loss experienced. Say for simplicity the % risk per trade ($) is equal to maximum loss then your risk is effectively the former.

For example,
Capital $10000
10% risk = $1000
maximum loss = $1000
risk factor = 1 = $1000

Say you want to buy shares @ $100 each with stop @ $90 then your risk per share is $10. You can theoretically buy $1000/$10 of shares = 100 shares. You will have to outlay your full capital on that single position i.e. 100 X $100 = $10,000.

Larry was a futures trader and his position sizing is expressed in contracts. If you are trading shares you will have to logically equalise based on the concept of risk and how it affects position sizing.

 

[Fran8]

The primary problem IMO is that you are approaching it as a mathematical rather than as a position sizing issue. Secondly, you are conflating risk, position sizing (the focus of the method) with profit potential.

The premise of the method is that the position sizing is a function of risk per trade but limited to largest loss experienced. Say for simplicity the % risk per trade ($) is equal to maximum loss then your risk is effectively the former.

For example,
Capital $10000
10% risk = $1000
maximum loss = $1000
risk factor = 1 = $1000

Say you want to buy shares @ $100 each with stop @ $90 then your risk per share is $10. You can theoretically buy $1000/$10 of shares = 100 shares. You will have to outlay your full capital on that single position i.e. 100 X $100 = $10,000.

Larry was a futures trader and his position sizing is expressed in contracts. If you are trading shares you will have to logically equalise based on the concept of risk and how it affects position sizing.

Thanks now I understand it !!!!
Thanks to all for the help
no wonder he made so much money he was using the whole bankroll for just 1 trade assuming a 10% to 15% lost in each trade

Very nice but the equity swing must have been amazing

What do you guys believe, I agree with the 2% risk but the thing i do not like about it is that it does not take into account win to loss ratio maximum loss etc

 

[Quantt]

What do you guys believe, I agree with the 2% risk but the thing i do not like about it is that it does not take into account win to loss ratio maximum loss etc

Actually, I don't agree with blank statements like 2%... You need to find exactly what is best for your trading system in particular... to start check the Kelly criterion - half Kelly is a good start...

 

[Arashimuro]

I fully agree with you, Quantt, every trading system is unique and requires an individual approach. If 2-3% is acceptable for me, for others it's a failure.

 

[Quantt]

I fully agree with you, Quantt, every trading system is unique and requires an individual approach. If 2-3% is acceptable for me, for others it's a failure.

The point is that you have to know exactly, (by using formulas like Kelly, etc) instead of just trusting some random number out of thin air (or from Alexander Elder book)...

 

[Dagerban]

I don't quite understand why people manage their funds following some examples taken from books? The main thing I believe is to manage them porperly and not to create any nonsence.

 

[Fran8]

I have read in a article that the optimum risk to avoid risk of ruin is to take 10% of Kelly formula.
Im not posting the article because is in Spanish

 

[NVP]

As a rule of thumb a rookie trader should be really really minimising their capital exposure to trades .....for me perhaps even 0.5% of cap per trade is too much .....the rookie needs plenty of trade cushion to allow,the inevitable drawdowns that come in early phase ....

These days I rarely still go above 1% per trade .....helps me sleep at night

Personally I find that whilst it’s nice to estimate what the risk return is on a trade re 2:1. 3:1. etc etc ... in truth its all hypothetical...

The only thing any trader can control is how much they are prepared to lose on a trade .....the rest is in the markets hands so stop worrying about it and only respond as it evolves

In trading only worry about what you can control and just ensure you have 100% consistency and perfection in your execution of thise areas....the rest will eventually then look after itself over time

N

 

[The_Magician (-_-)]

Explain more

The primary problem IMO is that you are approaching it as a mathematical rather than as a position sizing issue. Secondly, you are conflating risk, position sizing (the focus of the method) with profit potential.

The premise of the method is that the position sizing is a function of risk per trade but limited to largest loss experienced. Say for simplicity the % risk per trade ($) is equal to maximum loss then your risk is effectively the former.

For example,
Capital $10000
10% risk = $1000
maximum loss = $1000
risk factor = 1 = $1000

Say you want to buy shares @ $100 each with stop @ $90 then your risk per share is $10. You can theoretically buy $1000/$10 of shares = 100 shares. You will have to outlay your full capital on that single position i.e. 100 X $100 = $10,000.

Larry was a futures trader and his position sizing is expressed in contracts. If you are trading shares you will have to logically equalise based on the concept of risk and how it affects position sizing.

You certainly appear to have a grasp on this - I have been looking at Ralph Vince and his optimal f as well as the Kelly criterion for which I have the formulas, but this (Larry Williams) new to me. Could you please a) layout his formula b) explain the basis more and c) provide a realistic example using say a Euro/USD account with a 20K$ balance. Thanks in advance (do assume please that I am a dummy).