What is the best Money management system

[themickey]

Hi themickey-Sorry, But I strongly disagree. I would say that proper trade allocation is part of risk management and come second only to developing a profitable strategy. If you do not have the ability to rate your setups or trades before you decide on the proper allocation, I believe strongly that is a factor in a lack of success. Why would I place the same size trade on something I have a good expectation vs a great one?

Imo 'expectation' of how a future trade will result in a profit is like hope, it should have no place in trading.
The way I look at it, place your trade and expect nothing, throw out the emotion.
If it runs, great, if it fails, great too because you haven't increased trade size for a larger loss.
Optimism might be a great thing in business, in trading it tends to backfire.
Be optimistic, increase your trade size, when it blows up in your face, don't sell because "hey we're optimistic". Bigger the trade size, bigger the loss due to reluctance to be wrong.
Forget optimism, forget expectation, just place your bets!

 

[SPYAlgoTrader]

absolutely agree with TheMickey: adding dynamic trade allocation just adds an other variable - an overpowering important one - more important than any other aspect of the system which dilutes the edge of the system, leads to wrong back/forward tests or the illusion of a working system.

 

[TommyR]

You are joking, right? Maybe you can do this with realized gains, but not initial equity.

i am not joking. a single position S returns dS/S, overall i return dV/V so sum a(i)dS(i)/S(i)=dV/V. the variance is lower they say so diversification is good. the variance is lower except when i have only one asset. i thought Var(X+Y)=var x +var y +2cov so surely if +ve correlated variance is higher. not how it works unfortunately sunshine X is a quotient of two assets. all the pairwise correlations need to be 0 or the conditional expectations are not orthonormal and we are in trouble variance wise sunshine. so you can never get something to move like that by adding to the position at the suggested rate

 

[themickey]

Imagine a 60% winning trading system.
Example; We place 100 trades, of those 100 trades, when placed, we expected every one to be profitable, otherwise we would not have placed them.
But, 40 trades became losers.
Reality, we do not know which trade will be a winner or loser, we only know that over time we will be 'probably profitable'.
Changing bet size according to expectation or the last few trades results is wishful thinking.
Only change bet size according to your bank, that is bet size becomes a % of your whole trading portfolio.
That method then removes one more emotion out of the trade.

 

[ph1l]

The method from
could also apply to forex.

 

[themickey]

.....but its questionable if there is any value in holding 40 stocks instead of 30

The idea of trading stocks is to hopefully buy at the bottom and sell at the top.
That's the general theory, buy cheap, sell expensive.
Depending on your bank and cost of brokerage, the ideal scenario is 'just keep buying'.
"WHAT?"
Never mind the quantity of stocks, everytime an opportunity presents itself for buying at the bottom, then buy.
If you own 60 stocks and another opportunity comes of a juicy bargain, buy!
Those which you hold that begin to peel off and tumble below your trailing stop, sell!
Forget numbers, just look at opportunities.

 

[comagnum]

While it may be a good idea for newer traders to keep their risk fixed, many of the best traders vary their bet sizes even though they typically have defined risk rules & still probably risk less on avg than those that have a fixed bet size.

* Most retail traders take symmetrical R:R(risk $1 to make $1), or inverted asymmetrical R:R(risk $2 to make $1) - on avg these trades don't produce alpha.
* The best traders know when to put the pedal to the metal when a trade with potential asymmetrical r/r (risking $1 to make $4-$20) is identified. These trades justify taking on a larger bet size. You need a good experience base to do this from & need to have strong risk/trade mgmt skills.
* I expect every trade to fail - that makes me play much better defense. Should 3 of 7 fat pitch trades work out that can make for a stellar year, should only 1 of 7 work out that is often just a scratch out or close to it. Point being, done right you can add in more upside without taking on much more down side risk.

 

[themickey]

..... The best traders know when to put the pedal to the metal.....

Yes, after a market correction is usually best imo.
This window of opportunity is but fleeting, then comes the slow slog.
So market corrections are fantastic if cashed up, brave and pre-planned.

 

[ph1l]

Only change bet size according to your bank, that is bet size becomes a % of your whole trading portfolio.

Never mind the quantity of stocks, everytime an opportunity presents itself for buying at the bottom, then buy.

The method in Andreas Clenow's book aims to keep the proportion of risk to account value about the same for each trade. Allocating a fixed proportion of account value for each trade could result in some trades having much more risk than others.

 

[Robert Morse]

I guess my opinion is the odd man out. I do not expect to change anyone's opinion here, but I will try one more time. I would say that all traders, profitable and not, have created a predictive model. You can do that in an endless number of ways, but in the end, you are attempting to predict the future for a symbol or index for a selected time period. Based on past experience, some models work better than others during certain time frames and markets. If the market at any particular time resembles a past event when you viewed an occurrence, you can look to replicate that. The more accurate that was in the past, the more apt that is to work in the future. You are trying to place the odds of success in your favor. If in the past, I had positive results from a market condition, I want to try that again. The more often it works, I want to allocate more toward those scenarios. I would never want to place the same allocation to each trade because some are just better ideas based on the past. This worked for me for 25 years trading full time and works to this day.