easy money management advice?

T

travis

As I explained in other threads, I am not a computer science nor a math major, so I don't have enough of a background to make use of complicated money management formulas. I can only understand things like "invest x% on this system and y% on this other system", but I cannot grasp sharpe ratios, profit ratios... I get lost in all those ratios given by tradestation reports.

If anyone has simple ideas for money management - something like "money management for dummies" - please let me know. It would be appreciated and it would help me reason about this new concept that I am starting to understand only after incurring financial ruin repeatedly.

I have built about 20 different systems (in some cases, it's the same system, but traded on a different security) on excel, coding them in VBA, which is a great accomplishment for me, and they all work. However, these systems don't have a very high win ratio - they only win about 60% of the time, and they do win a bit more than they lose. As you can see, I am talking in simple terms and not giving out exact formulas, because I can't handle them.

What happened to me with these systems is that in the past year, twice, I doubled my money (trading the systems on futures, which makes it much easier) each month for about 3 months, bringing it from a few thousands to about 25k. Then suddenly, in less than one month, I lost it all.

Now that I am starting for the third time, which money management advice am I giving myself?

I've been thinking really hard, not just based on the tradestation tests but even more on what I saw in practice, which systems work best, and accordingly which systems I should trade more. Once again, I'd rather do this without using any complicated formulas, but only a simple ratio (with percentages) of how much to invest on each system.

With the little capital I had, both times I started with the systems that required the least margin. I got lucky, but they were too correlated. Now I am starting with just the one future that has the least drawdown (no formula to gather the drawdown, but an overall estimate I am making).

If I ever get up again to a capital of 20 thousand dollars, I am planning to increase the investment to 4 contracts for this future that seems to have the best performance. At the same time, I will also trade the other futures, to provide some diversification.

So far my money management consists of the attached excel sheet. I know I sound very illiterate, but if anyone feels like it, let me know any simple advice on money management.

Beware, even the Kelly criterion is too complicated for me. I tried it, I understand it, but it is complicated because it involves the use of other formulas (the probability of success of my systems, which I don't even know for sure)... basically it all gets too complicated and makes too many assumptions.

I know I sound ignorant or even stupid but I'd like to hear simple sentences like "invest more on the system that has the highest percentage of wins", or "invest ONLY on the system that has the highest percentage of wins", or "invest equally on all systems", or "invest ALL on the system that gives you the highest return".

One thing I did understand is that it is not sure that the system that makes more money or even the system that has the highest percentage of wins, is the system that I should start with or invest the most in. I also realize that a major concept is the concept of maximum drawdown (whether it is an exact number from a formula, or a rough estimate I am making).
 
I was trying to upload a new attachment and I deleted the old one, but now it won't let me upload it in the previous post, so here it is again.
 

Attachments

http://www.rinafinancial.com/

If you're a TradeStation user, this company offers everything you're seeking and more

Quote from travis:

As I explained in other threads, I am not a computer science nor a math major, so I don't have enough of a background to make use of complicated money management formulas. I can only understand things like "invest x% on this system and y% on this other system", but I cannot grasp sharpe ratios, profit ratios... I get lost in all those ratios given by tradestation reports.

If anyone has simple ideas for money management - something like "money management for dummies" - please let me know. It would be appreciated and it would help me reason about this new concept that I am starting to understand only after incurring financial ruin repeatedly.

I have built about 20 different systems (in some cases, it's the same system, but traded on a different security) on excel, coding them in VBA, which is a great accomplishment for me, and they all work. However, these systems don't have a very high win ratio - they only win about 60% of the time, and they do win a bit more than they lose. As you can see, I am talking in simple terms and not giving out exact formulas, because I can't handle them.

What happened to me with these systems is that in the past year, twice, I doubled my money (trading the systems on futures, which makes it much easier) each month for about 3 months, bringing it from a few thousands to about 25k. Then suddenly, in less than one month, I lost it all.

Now that I am starting for the third time, which money management advice am I giving myself?

I've been thinking really hard, not just based on the tradestation tests but even more on what I saw in practice, which systems work best, and accordingly which systems I should trade more. Once again, I'd rather do this without using any complicated formulas, but only a simple ratio (with percentages) of how much to invest on each system.

With the little capital I had, both times I started with the systems that required the least margin. I got lucky, but they were too correlated. Now I am starting with just the one future that has the least drawdown (no formula to gather the drawdown, but an overall estimate I am making).

If I ever get up again to a capital of 20 thousand dollars, I am planning to increase the investment to 4 contracts for this future that seems to have the best performance. At the same time, I will also trade the other futures, to provide some diversification.

So far my money management consists of the attached excel sheet. I know I sound very illiterate, but if anyone feels like it, let me know any simple advice on money management.

Beware, even the Kelly criterion is too complicated for me. I tried it, I understand it, but it is complicated because it involves the use of other formulas (the probability of success of my systems, which I don't even know for sure)... basically it all gets too complicated and makes too many assumptions.

I know I sound ignorant or even stupid but I'd like to hear simple sentences like "invest more on the system that has the highest percentage of wins", or "invest ONLY on the system that has the highest percentage of wins", or "invest equally on all systems", or "invest ALL on the system that gives you the highest return".

One thing I did understand is that it is not sure that the system that makes more money or even the system that has the highest percentage of wins, is the system that I should start with or invest the most in. I also realize that a major concept is the concept of maximum drawdown (whether it is an exact number from a formula, or a rough estimate I am making).
More...
 
Dummy,


a system without money management is always risky, even without leverage.

A system wit money management is less risky, leverage or no leverage.

Money management has to control the risk. Leverage can only control the speed of winning or losing, not the risk itself.


Quote from chvid:

money management for dummies = do not use leverage
More...
 
Spikey - leverage can force you out of a trade that would have won on the long run.

He asked for simple rules and he got one.

There is the kelly formula which really says underbet and underleverage.

Seems like a good place to start.
 
Even without leverage you can be forced out of a trade that would have won on the long run.

Without money management you could go long 4 months ago and still be long. But losing money. Leverage will not protect you for that.

Leverage should be part of a good money management system.

Quote from chvid:

Spikey - leverage can force you out of a trade that would have won on the long run.

He asked for simple rules and he got one.

There is the kelly formula which really says underbet and underleverage.

Seems like a good place to start.
More...
 
So far so good. Thank you all for the help with the simple reasoning. It is hard to find people here who will abstain from making reference to formulas and mathematical concepts, which immediately make me clueless.
 
I found some books on the subject:
Money Management Strategies for Futures Traders by Nauzer J. Balsara
The Handbook of Portfolio Mathematics: Formulas for Optimal Allocation & Leverage by Ralph Vince
A Trader's Money Management System: How to Ensure Profit and Avoid the Risk of Ruin by Bennett A. McDowell

Must admit that I haven't read any of them yet, will do soon though.
 
Risk Management and Money Management is part of Trade Management. Trade management is not about controlling the strategies internal algorithms. It is the process the trader uses to control the trade from design through production in your trading business. Trade management is not time frame, trading style or experience dependent. It is the guts of the trading business. It is how a trader designs the set up or strategy to produce results. It is how the traders built a business case in testing. It is how the trader manages the trades risk in live trading. It is how the trader designs performance and metric business reviews of a trade to manage the expectancy of the trade so adequate cash flow is produced. It is how the trader plans out how to handle the abnormalities or deviations from the strategy design in live trading so the accounts cash stays reasonably in tact.

All traders (whether they admit to it or not) are running a unique trading business. The crux of the problem for ‘newbies’ (slang on ET for new traders) is to find a method and business model that works and one that they can tolerate through the bumps and grinds that always happen. Yet traders continue to fail every day. This happens because we fail to describe to ourselves in business terms what we are trying to accomplish and learn how to make corrections in running our trading business.

Examine the following question that might be asked of a trader. “When you did your business (trading) planning why didn’t you have controls in your inventory management (risk control) to prevent inventory (trading losses) from choking the businesses cash flow (account losses)?”

When I ask new traders to respond to this question the answer in trading jargon comes back as “I don’t know. The losses kind of built up. Next thing I knew the money was gone…” But if were sitting down with these same traders (many who have advanced college degrees) and asked them to use business terminology – the tables turn and I would hear….”When I put my business (trading) plan in place I failed to have adequate controls to manage my cash flows (draw downs). It was my fault as a business manager. From my preliminary business study (testing the strategy) I had plenty of warning that a cash crunch could jeopardize my business. What I should have done is run extensive field tests (paper traded) of my strategy on several candidates (stocks) to see how if it confirmed my suspicions that the cash flows (draw downs) were going to be impaired. Another factor I noted during testing that also contributed to poor cash flow was an inadequate level of funding in the business (account) to begin with. When I examined my business records (log) this was apparent.”

Let us examine a few simple business models:

Day traders run their trading like a McDonald’s. The turn over is high in hamburgers (trades). They need to have great cash management for each hamburger (trade) in order to make money. The hamburger margins (trade profits) can become smaller if business slows down.

Swing traders run their business like a Best Buy. The turn over is lower in large screen Tv’s. They need to manage TV inventory (trades) so one big brand doesn’t chew up assets (account) and force unplanned sales (losses).

Now that you understand business models you start reading books on money management. The first thing that strikes you is the author gives you no idea for your business model what money management rules to use? All you find rules like the 2% fixed fractional? But when you tired 2% fixed fractional in testing with your automated system it produced 6 consecutive losses or a draw down of more than 12% which was way too large for you?

Book formulas are a starting point. But, the bottom line is automated traders have to build their own money management and risk rules to suit their business plan. And because there are no books on how to do this about 95% of traders fail. It’s a sad fact but true.

I have spent 12 years on this subject and I am still learning how to tweak my automated systems and rewrite my business plan. By the way:
- Highest % wins mean nothing in live trading.
- Highest return system means nothing in live trading.
- Max drawdown is something most automated traders screw up on.
- RINA will tell you about your profits but it won’t make them for you.
-Watch out for books they can kill your trading business.

What you are after is what I call an “energizer bunny” system.
 
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