Money Management: What's Better?

Quote from Corso482:

What's better? Using a fixed dollar amount of your starting capital per trade that stays the same no matter how the account fluctuates, then possibly adjusting that amount at year/month end etc., or using a percentage of capital that will constantly change as your account grows or shrinks.

I have a feeling that a constantly changing percentage would be better, yet I suck at math and I wonder if I'm missing some complicated nuance of the two choices.
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Personally, if I was a new trader .. I'd take out whatever profits over the base $ and put it in the bank. That way, there will be less to lose and less mental motivation to trade bigger than the base amount.

As far as someone already profitable, then of course you'd want to adjust your risk size to correspond with increased account size
 
I agree with VK. With fixed on system first then %risk per capita to test.

Also, personally:

I like to use fixed dollar when I'm using high percent profitable signals with low Risk/Reward Ratio. Like frequent scalping signals.

I use %risk per capita for low percent profitable and high risk/reward ratio. Like trend following signals.
 
Volker,

My question concerns your statement:

"Stop Based Risk %" method"


May I ask if this is the same as the Fixed Ratio Method...If you are not familiar with this method could you share the formula that we would use in the spreadsheet to calulate the ES.

Michael B.
 
That's quite a question ;)

If you are bad at math, then don't go for the Optimal F or other Kelly factors as they can be complicated in dealing with a dynamic environment but also very dangerous (they are somewhat flawed).
In your case, I would go with a % (like 10%) of total equity and then have a stop loss of a percent of that equity as to be about 1.5-2% of total equity so you don't burn yourself.

Fixed amounts are good but don't leave any room for growth in the future. Perfect for beginners i think.
 
Quote from ElectricSavant:

Volker,

My question concerns your statement:

"Stop Based Risk %" method"


May I ask if this is the same as the Fixed Ratio Method...If you are not familiar with this method could you share the formula that we would use in the spreadsheet to calulate the ES.

Michael B.
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Hi Michael.

This method has been described in the reasoned Active Trader Magazine. It is usually taken by Futures traders. You might want to look at the SystemLab articles. Here is an excample:

Current Equity = $120,000
Basis Price (EntryPrice) = $20.55
Stop Loss = $17.40
Maximum Loss = $3.15
2% of Equity = $2,400
Shares = ( 2400 / 3.15 ) = 762

Since I believe that this is the best method for portfolio level money management, it is integrated into the Wealth-Lab Developer $imulator. This feature is not available on the free portfolio backtesting feature on the web site. You also might find this article interesting: http://www.wealth-lab.com/cgi-bin/WealthLab.DLL/getpage?page=wrapup/20020310.htm Also see the possibilities of programming other portfolio level money management methods, for excample: http://www.wealth-lab.com/cgi-bin/WealthLab.DLL/getpage?page=articles/PositionSizingTrend.htm

Regards.

Volker
 
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