Formula: Basics of Money Management

Spectre2007

Spectre2007

Capital : 100K

Stop loss : Risk per trade : 1 percent of capital : 1K

Profit Potential : (all time high or low - current price) x quantity of derivatives x dollars per point/contract

Trend Filter : Bull or Bear

Enter short or long based on the trend filter. How do minimize the probability of the stop loss being hit.

1) enter on retracement so a buffer is built into the trade.

Keep repeating till you catch a trade that keeps you in the trade for multi week/months. A very simple system.
 
One of the critical aspects, if you increase your quantity of derivatives, the 1% stop loss on capital has a higher probability of being hit on just random variance of the derivative. So you have to end up decreasing the quantity.
 
Apply this to the ES contract. 1 point equals 50 dollars per contract. 1% ends up being 20 points in ES. If you can only risk 20 points, you can only trade 1 ES contract.

A common trend filter is the 200 day simple moving average. Since price is above the 200 day, one should look to get long. The question becomes where and when would one get long.
 
Spectre2007 said:
The question becomes where and when would one get long.
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Trades should only be entered on when max slippage is present, max slippage is an edge. Its usually found during news events. Its when the participants in the derivatives don't care what price is paid. Where one should enter is test of the daily low or high.

Look for central bank dates or non farm payrolls days. Test of daily high or low leads to range expansion and trend creation. Trend creation moves price away from entry without the stop loss being hit.

If stop loss is not hit and trade is good, where should or would one exit the trade. Ideally if price has tested the 200 day MA recently, one should stay in the trade till expansion leads to significant profit per trade and the 200 day MA travels. A certain percentage deviation from the 200 day MA can also be used. Or average number of days historically between 200 day MA tests can be used also. If the average interval is 5 years, than exit the trade as 5 year mark approaches.
 
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>Stop loss : Risk per trade : 1 percent of capital : 1K


Stop loss position is dictated by your system exit and not risk percentage.
They are separate although dividing one by the other gives how many contracts should be traded.

What you mean is "risk to stop loss" is 1%.
 
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Looks good to me - that is a good plan to begin with . You are properly capitilized and focused on risk management, nice to see for a change. The only thing I may add is that if you have a good chart stop such as a base of the last two days lows of say .35% from your entry than I will use the improved chart support risking say .40%. The idea being the 1% is the max risk, used when there is not a support to improve the default 1% risk. Over time the improvements will make a big difference. The best trades run hard right from the start so no need to eat 1% on every single that goes against you. Best of luck.
 
It's good to be able to vary position size, as to be more adaptive to price action and chosen risk. For stocks it's good to diversify as you never know with a single stock, even for once in a blue moon intraday.

Greed is not good, because it's based on blind hope of handouts and exploitation, not research and tests on fair opportunities in the markets.

Good qualities are: Honesty, patience, thoroughness, relentlessness, playfulness, out-of-box thinking and creativity. Every trader is different and need to create and maintain their own business. So outsourcing responsibility is generally suboptimal. Why would someone else hand their successes and hard work over to you? This rarely happens anywhere, except for the required incentives.

For those who think risking more than 4-5% on any given trade idea, study risk of ruin and monte carlo simulations. Even if you have a strong edge, you can always meet a string of losers in the short run. So I also prefer max account risk of 1-1.2% excluding slippage and depending on developing price action. Thing is, if you are "unlucky", which you really need to plan for in advance, it's so much harder to regain the loss. It takes a consistent +100% to fully recoup a sporadic realized loss of -50%. Such losses can be dramatic and much more probable for an immature system / trading plan.

People starting to analyze markets often focus on how much they can win. However, it's much more important to analyze how little one can lose and how. This is a kind of focus society suppress in most people, so generally prepping people to do the wrong decisions and focus from the start. In fact, if you try to explain how it works to people not versed in trading, they'll think you're depressing or get depressed and avoid the subject. Humanity seems geared for spending it all in one lifetime, and maybe that's a decision to be regretted in the following lifetimes?
 
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People starting to analyze markets often focus on how much they can win. However, it's much more important to analyze how little one can lose.
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Great point. The top traders of all times always have one thing in common - they make risk management the core of their trading. If you can play great defense the upside will take care of itself. I am in the 1% zone also per trade - on same trades it will be less on others a bit over - depends on volatility and the support/resistance. As in game theory like poker I press my winners adding size -carefully, when in a losing era I cut back my size and tighten my stop.Trading the appropriate size based on your capital is key. 20 losing trades in a row should not put you out of business. Over trading is another way to blow up. Many top traders, day and swing, these days are trading 1-3 times per day. Do the risk management right and the stress goes way down. Taking a lot of small loses is a part of trading - so the risk model has to account for that.
 
Spectre2007 said:
Capital : 100K

Stop loss : Risk per trade : 1 percent of capital : 1K

Profit Potential : (all time high or low - current price) x quantity of derivatives x dollars per point/contract

Trend Filter : Bull or Bear

Enter short or long based on the trend filter. How do minimize the probability of the stop loss being hit.

1) enter on retracement so a buffer is built into the trade.

Keep repeating till you catch a trade that keeps you in the trade for multi week/months. A very simple system.
More...

The founder of the systematic approach to acting Konstantin Stanislavsky famously once said: "The Theater Begins With the Cloakroom”.

Imho the trading begins with realistic expectations ...which are based on discovered market patterns.

The method based on those patterns will define how much percentage-wise from the starting capital one will have to expect to lose or win. One my want to loose 1% but the method with its underlining patterns may dictate something else....

Another thing: one have to find all patterns otherwise in some market conditions method will not work. Different patterns may have different requirements, and the combination of thereof etc etc..

Money management is the last, not the first thing (as many claim) in trading.

One have to adjust position size to the requirements of one's method (not the other way around).. that's it.
 
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