Is Money Management the "Holy Grail"?

[travisdu]

Ive been thinking about the elusive secret of the markets, and Im no quant genius or probability wizard but there seems only a couple of constants in market history.

1. The market is ever changing map of participant emotion but over time has a definite upward bias.

2. Those market participants who are consistant winners all use "money management".

Those are the only two really basic tenents that you can take to the bank.

Now to most these two basics seems unrelated, one being a matter of natural psychology reflected in the markets and the fact that if the natural bias of markets was down well there would be no markets to speak of, the second seems more of a construct, a reaction to the markets.

What if they are related though, what if those who do not use money management allow for the profits of those who do. What i mean is if everyone used money management would we have a flat market just the same as if everyone used the same indicators?

Are those who use money management simply picking up the scraps of those who do not?

Is the fact that a random entry system with proper money management can make money just an artifact of the melding of the two constants above? Does money management simply pick up what emotion leaves on the table with its extremes?

If thats the case then "money management" is not just a way to size position, it IS the entry.

Trav

 

[Nicodemus]

The market had an upward bias until March 2000. There is no guarantee, absolutely none, that it will go back up. The market has taught me not to look beyond the next 5 minutes.....or 1 minute, depending on which chart I'm using..

 

[dvegadvol]

Travis:

Great questions!

The market is a non-stationary, stochastic process. In other words, we can never be certain of what is about to happen - note that I said certain. There are patterns (or set-ups or wave counts, whatever you want to call it) that offer an "edge" and traders will attempt to exploit it. But I think it really does come down to having a plan and that plan must include risk mgmt.

The market is a process that is created and governed by humans and human beings do not usually trade in an emotionless, logical way. Therefore, imho, those traders who embrace the idea of limiting risk will have a logical "edge" over those who don't.

In a simple, empirical way you can show that this idea has merit:
use expected value.

If I'm 50:50 wins:losses and on average I make $1 for every $1 that I lose, my p/l is equal to (number of trades x round turn cost). If I trade 100 times and my costs are $15/ trade my net p/l = -$1,500

If I'm 50:50 and on average I make $1.25 for every $1 that I lose and I trade (500 shares) 100 times with the same costs my net p/l = +$4,750.

With equivalent probability of a win or loss effectively managing risk exposure can create for a profitable result.

I've developed many models for trading and risk management -and done a great deal of research into trading and the markets - and it boils down to effective risk management every time. I've got a number of spreadsheet models that help define trading risk. I wouldn't risk a penny without running a system (I prefer the term process) through them. Hope this helps.

Cheers

 

[nysestocks]

It would be very interesting to see if dvegadvol's models for trading and risk management worked out, since 2001?

Quote from dvegadvol:

Travis:

Great questions!

The market is a non-stationary, stochastic process. In other words, we can never be certain of what is about to happen - note that I said certain. There are patterns (or set-ups or wave counts, whatever you want to call it) that offer an "edge" and traders will attempt to exploit it. But I think it really does come down to having a plan and that plan must include risk mgmt.

The market is a process that is created and governed by humans and human beings do not usually trade in an emotionless, logical way. Therefore, imho, those traders who embrace the idea of limiting risk will have a logical "edge" over those who don't.

In a simple, empirical way you can show that this idea has merit:
use expected value.

If I'm 50:50 wins:losses and on average I make $1 for every $1 that I lose, my p/l is equal to (number of trades x round turn cost). If I trade 100 times and my costs are $15/ trade my net p/l = -$1,500

If I'm 50:50 and on average I make $1.25 for every $1 that I lose and I trade (500 shares) 100 times with the same costs my net p/l = +$4,750.

With equivalent probability of a win or loss effectively managing risk exposure can create for a profitable result.

I've developed many models for trading and risk management -and done a great deal of research into trading and the markets - and it boils down to effective risk management every time. I've got a number of spreadsheet models that help define trading risk. I wouldn't risk a penny without running a system (I prefer the term process) through them. Hope this helps.

Cheers

 

[Redneck]

Quote from travisdu:

Ive been thinking about the elusive secret of the markets, and Im no quant genius or probability wizard but there seems only a couple of constants in market history.

1. The market is ever changing map of participant emotion but over time has a definite upward bias.

2. Those market participants who are consistant winners all use "money management".


Trav

Food for Thought Sir


Having a trading methodology with a positive expectancy, along with stringent money management is what I think you’re searching for


Granted the markets are always changing, but then so are we, always adapting our methodologies to maintain a positive expectancy – and guarding our capital ardently with risk management

And believe it or not – Your true “Holy Grail” lies within you


I however have to question the market having a definite upward bias – Me thinks not Sir



Take Care
Redneck

 

[nysestocks]

He is correct.

The market has to have an upward bias, but no one ever said it had to be up all of the time, else how can economies exist!

 

[Redneck]

Quote from nysestocks:

He is correct.

The market has to have an upward bias, but no one ever said it had to be up all of the time, else how can economies exist!

Last I checked we're traders not economists


Since Nov 07 S&P down month over month except for April/ May 08

Try and convince someone who's invested money over this time frame the market has an upward bias

Personally I have no bias I just go where it takes me... but lately it ain't been up

 

[nysestocks]

Quote from Redneck trader:

Last I checked we're traders not economists


Since Nov 07 S&P down month over month except for April/ May 08

Try and convince someone who's invested money over this time frame the market has an upward bias

Personally I have no bias I just go where it takes me... but lately it ain't been up

While we are not economists, we can not ignore the facts about economies, and how they exist!

To do so would be childish!

Those who lost money deserve it, for they had a chance to take profits when the markets shot up, but no, they wanted to hold on and fill the big fat piggy pension bank for that big retirement day.

Ever hear of a mugs game!

 

[Redneck]

Quote from nysestocks:

Those who lost money deserve it, for they had a chance to take profits when the markets shot up, but no, they wanted to hold on and fill the big fat piggy pension bank for that big retirement day.

Wow what a cold hearted thing to say

So you think all the citizens who don't trade, but live their lives, work their jobs, and contribute to their 401K's dutifully

Deserve it

Unbelievable

 

[nysestocks]

Of course!

We are all masters of our own destiny.

If someone wants to put their money in the hands of others, like MadOff, or whatever his name is, then it is entirely their own fault, sorry, the world is a hard and cruel place, and those who are nor prepared to look after their own affairs, well, will have plenty of sharks around them.

The same goes for expecting to get "trading information" from those who write books!

Come on, when are people going to grow up and get out of Wonderland.

They publish trading books for one reason, and one reason only, because they know the majority want to be told what to do, and will not go and learn what they "have" to do themselves!

The truth always hurts!

Quote from Redneck trader:

Wow what a cold hearted thing to say

So you think all the citizens who don't trade, but live their lives, work their jobs, and contribute to their 401K's dutifully

Deserve it

Unbelievable