Money Management

Quote from OddTrader:
Planning/ optimization is one thing.

However the reality is practically how we are going to deal with the issues such as the risk of ruin due to unexpected streak of losses or else, particularly when running a system automatically.
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I completely agree. This is why Larry Williams started his Chapter 13 :) of his book "Long-Term Secrets to Short-Term Trading", titled "Money Management the Keys to the Kingdom" with these words:

"Here it is, the most important chapter in this book, the most important chapter in my life, the most valuable thoughts I can transfer from me to you. I have nothing of more value that I could possibly give you than what you are about to learn. This is not an overstatement."

then ends it with:

"So there it is, my money management formula:
  • (account balance * risk percent) /largest loss = contracts or shares to trade.
There are probably better and more sophisticated approaches, but for run-of-the-mill traders like us, not blessed with a deep understanding of math, this is the best I know of. The beauty of it is that you can tailor it to your risk/reward personality. If you are Tommy Timid, use 5 percent of your bank; should you think you are Normal Norma, use 10 percent to 12 percent; if you are Leveraged Larry, use from 15 percent to 18 percent; and if you are Swashbuckling Sam or Dangerous Danielle, use in excess of 20 per cent of your account ... and go to church regularly.

I have made millions of dollars with this approach. What more can I tell you: you have just been handed the keys to the kingdom of speculative wealth."
 
If you have a portfolio level backtester, test your strategy with % based risk. Use 1-2% risk per trade, though I use 1/2%.

If you use an ATR based strategy, you will find that it grossly underestimates EOD market risk and that you will have hugely inflated positions relative to what the market will throw at you.

When I say 5% I dont not mean cumulative risk, though it adds up to about that for the portfolio.

(.05 * Equity)/ Buyprice = # of shares to buy. This is a portfolio method, and it works for what I do. The actual real risk per trade is this:

((Close-Stop Loss) * # Shares )/ Equity = Approx .5% on average
 
Quote from cnms2:

I completely agree.
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Ryan Jones:"It did not take a genius to figure out that trading a bond system where the margin is $3,000 with a $5,000 account places the account at risk to ruin in 99.9 percent of the situations."
 
Some links of interest:

http://www.elitetrader.com/tr/index.cfm?p=2&t=72

http://members.aon.at/tips/moneyMan.htm

Q
http://www.turtletrader.com/money.html

Resources for Money Management or Bet Sizing

1. Bet Sizing Article by Ed Seykota and David Druz
2. Gibbons Burke Article on Money Management (PDF)
3. Seykota Risk Management Resource
4. Kelly Formula and Data Transmission
5. White Paper by Johan Ginyard (PDF)
6. Johan Ginyard Position Sizing Interview
7. Frequency v. Magnitude White Paper
8. Web Resource for Math, Black Jack, Kelly, etc.
9. Edward O. Thorp: Beat the Dealer (PDF)
10. Kelly's Original paper, March 21, 1956 (PDF)
11. The Sharpe Ratio
12. Tutorial Risk-adjusted Return

UQ

http://www.elitetrader.com/vb/showthread.php?s=&threadid=58689
 
Quote from psytrade:

If you have a portfolio level backtester, test your strategy with % based risk. Use 1-2% risk per trade, though I use 1/2%.

If you use an ATR based strategy, you will find that it grossly underestimates EOD market risk and that you will have hugely inflated positions relative to what the market will throw at you.

When I say 5% I dont not mean cumulative risk, though it adds up to about that for the portfolio.

(.05 * Equity)/ Buyprice = # of shares to buy. This is a portfolio method, and it works for what I do. The actual real risk per trade is this:

((Close-Stop Loss) * # Shares )/ Equity = Approx .5% on average
More...
I size my positions in the same way, to be 1% of my trading account, and I open up to 6 positions for a total of 6% of my account. When you wrote (close - stop loss) I assume that you meant by "close" the price at which you opened your position.

What is the maximum number of 0.5% risk positions that you can have at any given time? Also, how did you get to these figures: general accepted guidelines, or did you do an analysis of your average wins, average losses, percentage wins of total trades?
 
Quote from OddTrader:

Ryan Jones:"It did not take a genius to figure out that trading a bond system where the margin is $3,000 with a $5,000 account places the account at risk to ruin in 99.9 percent of the situations."
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It makes sense, although many traders realize this only in retrospect after a bad experience.

Who's Ryan Jones?
 
cnms2, I have as many positions as I can take on that are picked by the system, approx 20 using 100% margin, and 40 using 50% margin.
 
Quote from OddTrader:
http://www.investoriq.com.au/shop/prodList.asp?idCategory=92&topcategory=4
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Thanks. I actually have Ryan Jones's book "The Trading Game: Playing by the Numbers to Make Millions", but I haven't even browsed it. What did you find to be most useful in this book? I read Amazon.com's reader reviews, and it seams that RJ proposes the "Fixed Ratio" money management system that is useful for small accounts too.
"My second reaction was "Finally a system for the small accounts". Most of the money systems I've seen are designed for major accounts (e.g. "don't risk more than 2% on a trade" -- yeah, right!) The trader with $10,000 or less should find a very workable system to manage his account. His system handles important issues of how to build equity on the way up, and another section on handling downturns, including streaks. He gives a good discussion on other money management techniques as well."
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Quote from OddTrader:

Some links of interest:

http://www.elitetrader.com/tr/index.cfm?p=2&t=72

http://members.aon.at/tips/moneyMan.htm

Q
http://www.turtletrader.com/money.html

Resources for Money Management or Bet Sizing

1. Bet Sizing Article by Ed Seykota and David Druz
2. Gibbons Burke Article on Money Management (PDF)
3. Seykota Risk Management Resource
4. Kelly Formula and Data Transmission
5. White Paper by Johan Ginyard (PDF)
6. Johan Ginyard Position Sizing Interview
7. Frequency v. Magnitude White Paper
8. Web Resource for Math, Black Jack, Kelly, etc.
9. Edward O. Thorp: Beat the Dealer (PDF)
10. Kelly's Original paper, March 21, 1956 (PDF)
11. The Sharpe Ratio
12. Tutorial Risk-adjusted Return

UQ

http://www.elitetrader.com/vb/showthread.php?s=&threadid=58689
More...
Great links OddTrader! I am familiar with all of them, and I recommend them too, in the same order you did. :)
 
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