Money Management (Obviously!)

[brewski1984]

I was just trying to get my head completely around money management and would like some help.

I always hear the 2% rule thrown around as the benchmark amount of risk. Now I've set up a spreadsheet where I put in my entry, stop and target and it automatically works out what my maximum loss, profit and position size is for the 2%. The thing I notice is that I am only able to trade in whole £pp not with the pennies as well to make it exactly 2%.

How significant is this? If I round up/round down then I am not risking the same amount on each trade... 20p or 30p over 20/30/40/100+ points etc all starts to add up when I'm only only starting on £1/£2/£3pp.

Examples:

Account = £2000
2% risk = £40

If I have a trade with a 30 point stop I am only able to do either £1pp (1.5% risk) or £2pp (3% risk).

Account = £20000
2% risk = £400

A trade with a 30 point stop would mean I am able to adjust my position size to £13pp totalling a £390 (1.95%) risk.

Does that mean I need to start off with a higher capital so that the pennies are not so significant in order to give this a serious shot or is it just as significant at higher stakes? I realise this might be a stupid question but it's always best to ask, I always hear one of the main reasons people fail is being under capitalized and is this the reason why?

Thanks,

Brew.

 

[bangkoker]

IMO; the fact that you are taking MM so seriously, then the choice is up to you.. you either start off with the amount that is a little more than your 2% risk, if you have a bad start; drop to smaller amount or if you are nervous about it start off at the smaller account and build up when you are ready.

I would have thought of all the options, starting with a larger amount so the 2% is a bigger sum, is the least favourable. I started at over 2% of my fund (but with a notional fund of a little bit more (so if I needed to add more later I would)), I was fortunate to have a nice run at the beginning and as fund grew I was able to adhere to more sensible MM.

I am sure it is a personal thing, as long as you are not losing too much of your 'pot' to take you out of the game. If things aren't going well I go back to demo trading, read, study some more, build my confidence a little, dust myself down and start again.

Good luck:clover:

 

[mb325]

Had this problem a few times, you won't get told to do this in a book but what I do is determine my confidence in the trade and then round up or down. So using your example, if you're really confident then go £14pp and risk £420. If you're not confident then go with £13pp and risk £390. Some muppet will pop up now and say you shouldn't take a trade if you're not confident...

Or of course you could just round as best you can and trust to the laws of probability to even it out for you over the long run?

 

[brewski1984]

Thanks for your replies.

I was just a little unsure as to whether starting with a small account of say £2000 and slightly inconsistent MM would leave me heading for disaster straight away. I thought that if I was just going to top up the account with other money then I'm not really using an account of £2000 but more an account of all my total money with a really small percentage risk on each trade. The same scenario as I'll only deposit £300 on a site but still risk it as £2000 and top up if I need to.

Would starting with £2000 and rounding up/down and trusting the laws of probability actually work or am I likely to go bust?

 

[bangkoker]

There has to be a lot of variables obviously...

but if you are winning more than you are losing then you won't go bust surely.. well allowing for variance and the fact that obviously you could have a 50/50 strategy and still have a long string of losing trades..

 

[TheBramble]

Round down.

 

[brewski1984]

Maybe I think too much lol.

I guess you're right, slightly inconsistent MM on a smaller account isn't going to take me out of the game so it shouldn't be a problem, I'll just keep it around the 2% area.

Thanks for your replies, I don't know how to do a thumbs up smiley or I would.

 

[TheBramble]

Seriously mate, that you're thinking this way at all is a really good sign.

Regardless of account size, rounding down will NEVER take you out of the game in and of itself.

2% -ish sounds good.

 

[counter_violent]

Brewski,

There are SB providers out there who offer 0.1 increments ETX for example.

So example might be 0.5 (50p) min on Dow Cash with 0.1 (10p) increments thereafter.

Check a few out to see whats on offer.

 

[brewski1984]

Hi CV,

Strangely, I never really thought about that. I have a demo account on SML that allows a minimum of 10p per point and it goes up in increments of 10p afterwards. I assume this would be the same on a live account.

I was more just trying to get my head around the actual MM and whether differences like the examples I posted were significant enough to lead to disaster even with a decent strategy. Bramble's advice on rounding down regardless of account size seems pretty sound also.

Thanks guys.

 

[Rugby Trader]

IG also allows you to bet in increments of 1p

 

[ronblack]

How significant is this? If I round up/round down then I am not risking the same amount on each trade...

The 2% rule is already a heuristic rule, and you should not worry if it actually turns out that you risk 1.5% or 3.8%. What is important is that you follow the rule, i.e. the discipline that it enforces.

 

[anley]

If spread betting I always trade in strange amounts, like £1.78 or £3.87. I will also cover (profits or losses) strange amounts like 19p or 103p etc.

Same with shares, nothing wrong with trading 547 or 381 shares.