Money Management -- What do you use?

5

5of7

I was just replying to a thread where someone has been practicing, and they think they are ready to go, all they could manage to scrape together was $25,000 to turn it into $250,000.

So my question to you all, is what kind of money management do you employ (in general terms).

I'm not referring to trade management (placing of stops, multiple posns, runners, etc), I am referring to money allocation. How much of your account do you allocate to each trade, and do you adjust it?

I'll start.

For me personally I have many different systems, and each gets a different money management allocation. A lot of it depends on the frequency of the system, the stop loss used and the historic drawdown.

If it's a very frequent system, I am more aggressive since I know that my risk is spread out over more trades. It's like 1 coinflip per day, verses 100 flips per day. I know the more frequent one will be easier to achieve its expected result without streaks against me.

Then I make sure that the allocation can survive the worst historic drawdown in backtesting, plus I put a cutoff at approximately 1/2 that.

That's some of the basics of what I do, so I am curious what others use?

EMAIL REMOVED - STOP POSTING YOUR EMAIL PLS (MODERATOR).
 
Hi,

Money Management is the most important thing to success in trading. As we're in the business of making money, and in order to make money we have to learn how to manage it. This is one of the most overlooked areas in trading. Many traders are just anxious to get right into trading with no regards to their total account size. They simply determine how much they can lose in a single trade and hit the trade button. There is a term for this type of investing. It's called GAMBLING!

When you trade without money management rules, you are in fact gambling. You are not looking at the long term return on your investment. Instead you are only looking for that "jackpot".

So, here is come the money management! Money management rules will not only protect us, but they will make us very profitable in the long run.

Consider this example:

People go to Las Vegas all the time to gamble their money in hopes to win a big jackpot, and in fact, many people do win. So how in the world, are casino's still making money if many individuals are winning jackpots? The answer is that while even though people win jackpots, in the long run, casino's are still profitable because they rake in more money from the people that don't win. That is where the term "the house always wins" comes from.

The truth is that casinos are just very rich statisticians. They know that in the long run, they will be the ones making the money -- not the gamblers. Even if you win $100,000 jackpots in a slot machine, the casinos know that there will be 100 more gamblers who won't win with that jackpots and the money will go right back in their pockets. This is a classic example of how statisticians make money over gamblers. Even though both lose money, the statistician, or casino in this case, knows how to control their losses. Essentially, this is how money management works. If you learn how to control your losses you will be profitable!

Remember, You're in the BUSINESS of making money, not GAMBLING!

Happy Trading!
 
Trade 1 - 25K for a 10 pip loss.
Trade 2 - 75K for a 10 pip loss.
Trade 3 - 200K for a 10 pip gain.

Overall= negative 10 pips with a $100 profit.

Variable trade size is a valuable tool. Trick is learning when to trade small and when to trade bigger.
 
Some other traders in our collective do vary trade size frequently from trade to trade, and do amazingly well. I'll ask them to chime in on their criteria.

Some of them trade scary large sizes (they manage other people's money) so they might not want to spill their "secrets" but I'll ask.

I personally don't, and want all my strategies to be normalized to each other, and my goal is smooth growth (a profitable week, after profitable week.) I know the guys who manage other people's money are under huge pressure to produce, and are at the limits of liquidity (some need to trade 600 full lots per trade, and obviously have trouble). So their money management tactics are for a different reason.

P.S. The following is not my email, and is only my designation (signature) : - )

At the ************, I am trader number five of seven (5of7), which in turn is only a part of the whole being Unimatrix Zero-Two (Now that my full geek has been exposed).

: - )
 
Quote from bugscoe:

Trade 1 - 25K for a 10 pip loss.
Trade 2 - 75K for a 10 pip loss.
Trade 3 - 200K for a 10 pip gain.

Overall= negative 10 pips with a $100 profit.

Variable trade size is a valuable tool. Trick is learning when to trade small and when to trade bigger.
More...

bugscoe, are those part 1, 2, and 3 of the same trade or are they separate trades? I've seen most people tend to reduce trade size after losing trades and increase after winning trades, you're doing the opposite, what is your thinking behind that if you don't mind sharing, is it to recoup losses quickly? What happens if trade 3 loses, do you keep martingaling?

My money management is aggressive compounding, risking x% of gains in addition to x% of equity, and reducing risk after a loss.
 
Quote from forexbullbear:


Consider this example:

People go to Las Vegas all the time to gamble their money in hopes to win a big jackpot, and in fact, many people do win. So how in the world, are casino's still making money if many individuals are winning jackpots? The answer is that while even though people win jackpots, in the long run, casino's are still profitable because they rake in more money from the people that don't win. That is where the term "the house always wins" comes from.

The truth is that casinos are just very rich statisticians. They know that in the long run, they will be the ones making the money -- not the gamblers. Even if you win $100,000 jackpots in a slot machine, the casinos know that there will be 100 more gamblers who won't win with that jackpots and the money will go right back in their pockets. This is a classic example of how statisticians make money over gamblers. Even though both lose money, the statistician, or casino in this case, knows how to control their losses. Essentially, this is how money management works. If you learn how to control your losses you will be profitable!
More...
Uhh, this example has nothing to do with money management and everything to do with having an edge.

If you want to talk about money management at a casino, then talk about how much capital they have on reserve to pay for jackpot situations or what size jackpot they're willing to run. Like, a Casino isn't going to run a jackpot that pays out Billions of dollars even if they have a great edge on it. If someone does hit it, then the casino could go broke.

An old money management rule for poker is to have at least 300x the big bet at the table you're playing in order to compensate for swings. Large swings will go up to around 50x the big bet on any given day.

If you extend the logic to trading (trading is different, so adjust accordingly): take your total bankroll and divide by 6. That is the most you should lose on your absolute worst days. So if you've got a bankroll of $20,000. You should never lose more than about $3000 on even your absolute worst days. Also realize that as you make money and your roll goes up, you can risk more using this basic system. If you start losing, you should risk less to keep your max losses lower.

This seems very aggressive to me, but may be worth it if you have a good edge. Without an edge, the only money management skill that can save you is if your money management tells you not to trade at all.
 
Quote from cabletrader:

bugscoe, are those part 1, 2, and 3 of the same trade or are they separate trades? I've seen most people tend to reduce trade size after losing trades and increase after winning trades, you're doing the opposite, what is your thinking behind that if you don't mind sharing, is it to recoup losses quickly? What happens if trade 3 loses, do you keep martingaling?

My money management is aggressive compounding, risking x% of gains in addition to x% of equity, and reducing risk after a loss.
More...

Cable - they would be separate trades.

My thinking is this: I determine what is the largest trade size for my account and then I work well under that. This way I have lots of wiggle room to get out of trouble. I take many trades in a day trying to trade all the little moves/swings. My pip target is usually the same so when I'm wrong and then get it right, I don't want to have to earn double the pips to recoup. And if I'm up good for the day and trading well, I do usually scale back to protect what I've earned on the day. So I guess it is backwards but it's just a style that developed for me and I was able to make work.

If I get it wrong 3-4 times, I'll usually sit on my hands and wait for some momentum to come into the market to confirm a breakout or something.

Most the trades I initiate are usually at pivotal points, either daily pivots, fibs or regular sup/res points.
 
You must log in or register to reply here.
Back
Top