Money management

[SanMiguel]

As a way of money management, is there any flaw in betting less as your account capital decreases through trades gone wrong, and increasing lots as your account capital grows through trades gone right?

 

[NetTecture]

Yes - decerasing trade size means that you need larger successes (in percent of risked capital) to gain back to original level after loosing trades, making it harder to get back up.

 

[TheBramble]

If you're using a fixed percentage of your trading capital as risk this will be how it works anyway.

 

[SanMiguel]

Yes - decerasing trade size means that you need larger successes (in percent of risked capital) to gain back to original level after loosing trades, making it harder to get back up.

What about as the capital increases? Risking more?

If you're using a fixed percentage of your trading capital as risk this will be how it works anyway.

Not if you start with x capital and say that once it goes below that point you are not going to decrease the lot size.

 

[arabianights]

Your main goal is to not blow up. Necessarily this means that as trading account decreases trade sizes become smaller.

Your secondary goal is to make lots of money. The best way to do this is to increase your trade size.

So yes, you should keep your trade size proportional to that of your account

 

[TheBramble]

Not if you start with x capital and say that once it goes below that point you are not going to decrease the lot size.

Then it ceases to be a fixed percentage, doesn't it.

If you always risk no more than say 1% that would meet your criteria in post #1.

 

[forexsys2]

Then it ceases to be a fixed percentage, doesn't it.

Yeah, it does As far as I understand.

 

[MrGecko]

Good compromise could be to have equity 'bands'.

This can be particularly useful if you are dealing w/ fixed point sizes (DV01) - as is the case with futures, for example.

You can't buy 3.75 of a futures contract... another approach is as GJ says, say one contract per $10,000

 

[TheBramble]

Although when people talk about for example risking 2% of capital per trade so that they could survive 50 losing trades in a row, that by necessity implies a fixed absolute position size right?

No. If you risk a fixed percentage of your trading capital per trade, it’s the size of the risk (entry to initial stop) that will determine the size of the position.

Taking your 2% as an example, say that translates into $2000 risk per trade and your risk is entry 1.2345 on a short with a stop at 1.2355 i.e. 10 pips, you’ll trade a position that’ll equate to $2000/10 or $200 per pip move (20 lots).

If your risk is entry 1.2345 on a short with a stop at 1.2375 i.e. 30 pips, you’ll trade a position that’ll equate to $2000/30 or $66 per pip move (6 lots).

And you're not talking about 50 consecutive losing trades anyway. It's 2% of a decreasing trading
balance. You could make the pain last almost forever...

 

[Shanghai]

You could make the pain last almost forever...

And how could anyone not want that

And of course this is also the logical way to go. If you have a series of losing trades then this could be happening as a part of normal trading or you could have a strategy that is not working so well or your psychology could be shot (or a combination of the above). The last thing you want to be doing in that situation is to be increasing your position size to "regain your losses". Far better to gradually increase your trade size as your account grows.

 

[jeffsmith]

Put two rookie traders in front of the screen, provide them with your best high-probability set-up, and for good measure, have each one take the opposite side of the trade. More than likely, both will wind up losing money. However, if you take two pros and have they trade in the opposite direction of each other, quite frequently both traders will wind up making money - despite the seeming contradiction of the premise. What's the difference? What is the most important factor separating the seasoned traders from the amateurs? The answer is money management.