Mine risk/money management rules

[VingTsunKuen]

Hello!

After some hard work i came up with this rules.:smart:
This will be mine risk/money management "strategy" and is part of mine general trading strategy that i am working on.
I am sure that there is place for improvement of this rules so please feel free to add your opinions,comments or experiences whit some of these rules(if you have used them)
Here we go:

-Businessman risk-​

1.

2% Rule

You will NEVER risk more than 2% per position.
You must calculate spread within 2%
For now you will risk no more than 0.5%
You WILL ALWAYS use Stop Loss.
When you take into consideration possible position you will first look where you could place Stop Loss.This is the most important.

2.

6% Rule
At the beginning of every month you will calculate how much is 6% of your account.
If losses in current month exceed 6% you may not trade until next month.
You may not have more than 6% risk in all opened positions at any time.
If you have 6% risk in total opened positions you may not open new positions until 6% rule allow you to do so.

3.

True Leverage Rule
You may not have true leverage more than 3:1.In other words allowed value of all opened positions can not be bigger than 3 times your account value.
For now you will work with 1:1 (true)leverage
For every pair in which USD is quote currency you will calculate what is the position worth in USD according to current exchange rate.You will do it to be sure that at any given time worth of position is not bigger than 3 times your account value.

4.

Position Size
You will calculate size of position whit next formula:

PS=(AVxR%)/$R​

PS=Position Size
AV=Account Value
R%=Percent of account you will put on risk
$R=Risk expressed in USD

After that you will calculate what is the worth of position(lot) in USD and you will check is this allowed according True Leverage rule.

5.

Risk/Reward Rule
You will enter positions that have minimal 1:2 R/R
You will never enter positions in which you have negative R/R ratio.

6.

Rule of increasing/decreasing amount of lots
Amount of lots must be increased/decreased according your account value.
Also it must respect all other rules.


What do you think?Are this rules solid enough to keep me going in the long run:?::!:
Do you have any good suggestion that could improve this list?:idea:
Please feel free to take part in this thread and to help me correct those rules if there is need to do so
Regards,
VingTsunKuen

 

[shadowninja]

Sounds good if you can stick to it. It also assumes you actually have a working system, otherwise it just means you lose your funds a lot slower.

 

[VingTsunKuen]

It also assumes you actually have a working system, otherwise it just means you lose your funds a lot slower.

Sure,one must have system which works.Right now i have done preliminary back-testing of one trend following system.It had 60-40 win-loss ratio.It is not bad,but for more reliable results i must backtest it thoroughly and then test it on demo for at least six months.That is the plan...
Also there are few other(trend following)systems which i like and i will test them.Maybe i could pull out of them even better W/L ratio although i thing that 60-40 is not so bad.
Also i am working on some rules regarding trading psychology.Whole idea is to build mine trading strategy/plan on Alex Elder s pillars of trading.I like his idea very much.MIND,MONEY,METHOD!:clap:
Regards,
VingTsunKuen

 

[anley]

Very good rules VT.

However, you've done all the easy work, ie thought about them and written down a firm plan.

BUT.........the hard work is to follow them

Good luck.

 

[anley]

Very good rules VT.

However, you've done all the easy work, ie thought about them and written down a firm plan.

BUT.........the hard work is to follow them

Good luck.

 

[jiggly]

if your system works as you say it does, you should have a vlaue for your equity drawdown and realised draw down, i.e you should know how much you account has lost or could potential lose on its average losing run.


I think your rules are good when you read them from the offset, but i cant help but think that you could put your money to work harder for you. My initial observations for these money management and risk rules is that it would take you absolutely ages to make a significant percentage return on your account equity.

now i dont know what your trading objectives are but from my perspective i would not stop trading, if my system works and if my first 3 trades of the month came in at a loss.

you have stopped trading for what exactly? if your systems spits out more trades would you not take them? they could be the ones to bail you out.....

 

[shadowninja]

Yep, with a 60% win probability, there is a chance you could get 10 losses in a row even if your system works.

A 60% or even a 50% win probability isn't a bad thing if your reward:risk is good. If it's 50% and you're risking 1 tick for 1 tick then that's a waste of time; if you're risking 10 ticks for 1 tick, that's even worse.

 

[ligo]

ok in theriory

hi ligo
rule 2 always use stop/lose, in the real world of forex your TRADING PLATFORMS ARE NOT YOUR FREINDS, they are out to take all your deposits, if you place your stop/lose to near they will almost certanly take you out.BEWARE



[thQUOTE=VingTsunKuen;493596]Hello!

After some hard work i came up with this rules.:smart:
This will be mine risk/money management "strategy" and is part of mine general trading strategy that i am working on.
I am sure that there is place for improvement of this rules so please feel free to add your opinions,comments or experiences whit some of these rules(if you have used them)
Here we go:

-Businessman risk-​

1.

2% Rule

You will NEVER risk more than 2% per position.
You must calculate spread within 2%
For now you will risk no more than 0.5%
You WILL ALWAYS use Stop Loss.
When you take into consideration possible position you will first look where you could place Stop Loss.This is the most important.

2.

6% Rule
At the beginning of every month you will calculate how much is 6% of your account.
If losses in current month exceed 6% you may not trade until next month.
You may not have more than 6% risk in all opened positions at any time.
If you have 6% risk in total opened positions you may not open new positions until 6% rule allow you to do so.

3.

True Leverage Rule
You may not have true leverage more than 3:1.In other words allowed value of all opened positions can not be bigger than 3 times your account value.
For now you will work with 1:1 (true)leverage
For every pair in which USD is quote currency you will calculate what is the position worth in USD according to current exchange rate.You will do it to be sure that at any given time worth of position is not bigger than 3 times your account value.

4.

Position Size
You will calculate size of position whit next formula:

PS=(AVxR%)/$R​

PS=Position Size
AV=Account Value
R%=Percent of account you will put on risk
$R=Risk expressed in USD

After that you will calculate what is the worth of position(lot) in USD and you will check is this allowed according True Leverage rule.

5.

Risk/Reward Rule
You will enter positions that have minimal 1:2 R/R
You will never enter positions in which you have negative R/R ratio.

6.

Rule of increasing/decreasing amount of lots
Amount of lots must be increased/decreased according your account value.
Also it must respect all other rules.


What do you think?Are this rules solid enough to keep me going in the long run:?::!:
Do you have any good suggestion that could improve this list?:idea:
Please feel free to take part in this thread and to help me correct those rules if there is need to do so
Regards,
VingTsunKuen[/QUOTE]

 

[Mathemagician]

Rule 5 needs to go as it is an unnecessary constraint that has little to do with risk management. Many models with a less than 1:1 R/R are quite successful and profitable. They simply have to win more often than they lose.

 

[VingTsunKuen]

I am glad to see good response
I am gonna try to answer and controvert on subject.
So lets go:!:

However, you've done all the easy work, ie thought about them and written down a firm plan.
BUT.........the hard work is to follow them

BUAHAHAHA,Anly i am Ving Tsun Gong Fu student and i have iron discipline and will!:cheesy:
Just kidding a bit although i do train Ving Tsun..I know that there are temptations to break rules you set,but to tell you the truth i have never had problem with following rules from which i could have benefit

Jiggly says:

if your system works as you say it does, you should have a vlaue for your equity drawdown and realised draw down, i.e you should know how much you account has lost or could potential lose on its average losing run.

I agree with you.If you have reed mine last post than you have noticed that i have do just preliminary back testing.I was counting just wins and losses,nothing else.So now i must do detailed and thorough back testing where i will,among other records,make record of maximum drawdown and its impact on account.

My initial observations for these money management and risk rules is that it would take you absolutely ages to make a significant percentage return on your account equity.

I want to run a marathon rather than 100m sprintYou know that this game is played on the long run
How could you know that i am not going to play the game whit standard account and 100k on it?
You still think that "it would take you absolutely ages to make a significant percentage return on your account equity" whit that amount of deposit?

....but from my perspective i would not stop trading, if my system works and if my first 3 trades of the month came in at a loss.

I have said that MAXIMUM risk will be 2%,not that i will always risk two percent.So it is not word about 3 trades.It is more likely that i will not risk more than 0.5%.It suits well in mine day trading and i feel comfortable whit this amount of risk,which is important.Sometimes it could be less than 0.5% on risk as for now i trade just one lot.The point is that whit 0,5% or even smaller risk it would take at least 12 losses to hit the "6% rule".Usually what i do after 3-4 losses in the row is that i quit trading for day or two.Reason for this is fact that losses affect your psychological shape and you get clumsy.
So i think that i have enough "breathing room" in this "6% rule"

you have stopped trading for what exactly? if your systems spits out more trades would you not take them? they could be the ones to bail you out.....

You mean what is the reason for stopping trading?To protect my self from my self!:cheesy:
If i hit the "6% rule" i would not pull the trigger if mine trading system/strategy gives the signal.Those signals could be ones that would bail me out but also could be ones which will put me even deeper in loss.So i think that is smart to take a break,lick your wounds,fill battery or what ever,and then go on with trading.

Mathemagician says:

Rule 5 needs to go as it is an unnecessary constraint that has little to do with risk management. Many models with a less than 1:1 R/R are quite successful and profitable. They simply have to win more often than they lose.

Interesting.Rule number 5 has to do more whit rules of system,right Math?
When you say "less than 1:1 R/R" you think that they have negative R/R ratio??
Any other suggestions or comments??

Regards,
VTK

 

[jiggly]

I want to run a marathon rather than 100m sprintYou know that this game is played on the long run
How could you know that i am not going to play the game whit standard account and 100k on it?
You still think that "it would take you absolutely ages to make a significant percentage return on your account equity" whit that amount of deposit?

yes that is exactly what i am saying, percentages are a relative measure, making a 10% return on your investment over the course of the year is not a good return given the risk we are taking in the market, in my opinion. regardles if you are trading a $1m account or a $1000 account. the only diference between the two is you could live off the larger account but not off the smaller.

still the return is poor.

what i am trying to say is when you have a predictive outcome of results from your system, you should maximise the amount you can trade, still being comfortable with the risk.

risking 0.5% at a time is pointless if you have a win probability of 8 out of ten trades and a risk reward of 1:3. THIS IS A BLINDING SYSTEM and you will not be trading it to its safest maximum potential, you are hindering yourself from potentially making even more money.

dont spend a lot of time backtesting your system, just a quick scan of the charts for 100 trades should give you a good idea of the expected out come, if it looks good at firt glance then forward test it, for another 100 trades. then you will get the information you need.

 

[VingTsunKuen]

what i am trying to say is when you have a predictive outcome of results from your system, you should maximise the amount you can trade, still being comfortable with the risk.
risking 0.5% at a time is pointless if you have a win probability of 8 out of ten trades and a risk reward of 1:3. THIS IS A BLINDING SYSTEM and you will not be trading it to its safest maximum potential, you are hindering yourself from potentially making even more money.

Yes,that is true.You are right
I will consider this and change it.I think that this 0.5% idea is product of following.I have not tested and demo traded this system long enough to feel comfortable/confident whit it.Basically,i have wrote that FOR NOW i will use 0,5% and this "for now period" refers to period of testing.
But,anyway,you are right.As i am going to do back and forward tests on demo account there is no need to be so conservative
Thanx Jiggly!
May the positive pip be with you:cheesy:
Regards,
VTK

 

[Mathemagician]

Interesting.Rule number 5 has to do more whit rules of system,right Math?

This is correct.

 

[VingTsunKuen]

Thanx,man...

 

[robicat]

Thanks for posting yr system.

 

[VingTsunKuen]

Thanks for posting yr system.

You are welcome!
As Richard Dennis have said,i can publish in newspaper trading rules and system and no one will follow it:cheesy:
Come one guys and gals!
I am waiting for more suggestions although there were some useful advices
So rule number 5 will go out and i will also kick out 0.5% rule.
Anything else to add/remove???:idea:
I am all ears:!:
Regards,
VTK

 

[dfxdfx]

running before walking

standard money sizing rules usually suggest that you should risk much MORE than a beginner should.
by beginner I mean anybody trading less than 1 solid year.
scale it up, and often scaling it up is a challenge. that's what got me this week: trying to scale up and it affected my decisions. I lost 5 days of work.

its important IMO not to try to make too much money until you have a strong assured feeling of your skills. until you've blown up (at a small scale) and learned lessons there.

plan to make that crazy cash next year.

I think your rules are good when you read them from the offset, but i cant help but think that you could put your money to work harder for you. My initial observations for these money management and risk rules is that it would take you absolutely ages to make a significant percentage return on your account equity.

 

[VingTsunKuen]

standard money sizing rules usually suggest that you should risk much MORE than a beginner should.
by beginner I mean anybody trading less than 1 solid year.
....its important IMO not to try to make too much money until you have a strong assured feeling of your skills.
plan to make that crazy cash next year.

I must say that i agree whit you dfxdf!
I am involved in FX market for just 3 months so i need to learn more and get more trading experience so that i can build confidence in my trading skills.Risking more or less in not such issue when trading demo,and that is what i will be doing for quite some time.But when trading real money that IS an issue for sure.
I am planing to make very,very crazy cash in next ten years:cheesy:
Regards,
VTK

 

[VingTsunKuen]

YO,YO,YO!:clap:

After some thinking and studying i came up whit those modified rules.
I want to share them whit you so that we can comment it.If some one finds them useful and want to try them i will be more than glad
There we go..

1.

2% Rule will be the answer on the "How much i can afford to lose per position?"question

You will NEVER risk more than 2% per position.
You must calculate spread within 2%
You WILL ALWAYS use Stop Loss.
When you take into consideration possible position you will first look where you could place Stop Loss.This is the most important.

2.

True Leverage Rule will answer "How much value my position may be worth in $?"question

Your true leverage should be around 3:1.In other words allowed value of all opened positions must be around 3 times your account value.
For every pair in which USD is quote currency you will calculate what is the position worth in USD according to current exchange rate.You will do it to be sure that at any given time worth of position is approximately 3 times your account value.

3.

Position Size rule will answer the "How much lots to buy?" question
You will calculate size of position whit next formula:

PS=(AVxR%)/$R

PS=Position Size
AV=Account Value
R%=Percent of account you will put on risk
$R=Risk expressed in USD(total PIPS on risk x Worth of pip)

After that you will calculate what is the worth of position in USD and you will check is this allowed according True Leverage rule.

4.

Rule of increasing/decreasing amount of lots will answer the "When to add/subtract lots?" question

Amount of lots must be increased/decreased according your account value.
For every 5000$ on mini account you will trade 1 lot.If yo for example have 10000$ on your account and next day it drops on 9948$ you may trade just one lot.


That is all folks!

Basically i think that those rules give answers on very important questions.
For example when you determine on chart how far is stop loss from possible entry
you would use 3. rule combined with 1. rule to figure out how much to buy.Then you will check 2. rule to see would you be over-leveraged with this amount of lots.
At the end you will check 4. rule to see are you allowed to buy x amount of lots
according to "5000$ per lot"
So it looks like to me that i have build few layers of defense around mine account.
That should be good thing if i really did it.
What do you think?
Is this better than last version??
Regards,
VTK