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  • MoneyManagement material

    Hi Folks,
    I was wondering if any of you came across a good money mgmt 'system'?
    I know for sure it all comes down to good money mgmt, if you have a system that works out well only 50% of the time, with proper money mgmt I got told you can turn this into a cashcow.
    Oposit a system with high degree of success (+80%) you can still loose your account if you don't follow rules.

    I am not looking at advice: don't risk on any trade more than xyz% of your account but I am more looking into profound background as to why one should not 'ride' the equity curve, so to say adopt the risk on trade according to loss and wins.
    To not get me wrong again I am not thinking at the double the risk every loss thing (martinggale?) but rather something opposite: defense your risk incase of loss or multiple losses encountered.
    Your help and advice is much appreciated!
    EGI1610

  • #2
    Re: MoneyManagement material

    Originally posted by simoniex
    anyway the risk management is not easy, trade well , displine well...
    Simoniex,
    Rather than just only said Risk Management is not easy, why don't you explain more detail so we can learn something ?
    We already known it was difficult, but how did you manage on that ? How to trade well ? How to discipline well ?
    Otherwise, your post will consider it as a junk.

    Regards..

    Comment


    • #3
      Re: MoneyManagement material

      @simoniex
      Well I can only agree to adrian1974 non of the posts helped yet.

      What I know:
      1) Set your stoploss and follow through, don't even think about it being hit when it is hit
      2) choose your position size initially already low enough to allow the trade to breath. It doesn't make sense to await a 100pip move but only allow 20 pips stoploss. A risk reward ratio of about 1:2 seems appropriate (meaning an expected 100pip move should cater for a 50pip stoploss breathing space)
      3) calculate your positionsize backwards: target profit -> stoploss together with overall drawdown acceptable makes your lotsize...
      4) once you are well enough in the money (hm this is again discritionary...), make sure to make this trade a free trade (using trailing stop or manually adopting depending on your trading style)

      What I am curious about: is there more? What else can one do better in money mgmt?
      So I do hope you can give more insight into the true asset of a real trader
      EGI1610

      Comment


      • #4
        Re: MoneyManagement material

        MM is a little bit more....
        You will find a lot of information in the www about the MM concept.

        e.g.

        http://www.4shared.com/file/15168098...managment.html
        http://www.4shared.com/file/65275072...k_of_Ruin.html

        The Main Idea is:
        -don't loose your initial funds
        -make sure that your money grow

        Comment


        • #5
          Re: MoneyManagement material

          Thanks for the links.

          A concept I found interesting but have not applied yet is to "ease into the trade".

          For example:
          Enter the trade following your proper system/position sizing, but with just 1/3 of
          the amount initially. When it moves your way by a certain amount, say 15 pips, enter
          the second part and likewise the third. Exit the reverse way.

          Some like it, some don't. Worth a try anyway.

          Comment


          • #6
            Re: MoneyManagement material

            You can use Market System Analyzer the best program for MM. Is esasy to find and not dificult to use.

            Comment


            • #7
              Re: MoneyManagement material

              There are 3Ms in Trading

              Mind,Method,Money Management(I'm not the author of these 3Ms,you can find it if you read forex books)

              Mind - This is our psychology,there are some people who have done exceeding well but they could not make money when real money is involved. This is something that only the person can discipline himself/herself on

              Method - There are MANY indicators,signals out there that tells you when to take the trade so how should you decide on how to take the trade? There is no holy grail in the market and for this type i believe it is more of just how you get used to how your indicator looks before you know you have a high probability setup. Another important thing you must understand is whether your setup is suitable for Trending Market or Ranging Market as this will determine how well you fare. If you do not know this then you had better go and think about it.

              Money Management - This is the tough part for most people because you should not be risking more than 8% of your capital in a single trade(this is my rule) And 1 should not have more than 3 trades per day(1 trade = open and close) because the more often you trade,the easier it is to burst your account.

              All it takes to be successful for trading is discipline. The rest you can pick it up along the way but discipline is something many people lacked.

              Comment


              • #8
                Re: MoneyManagement material

                Important Money Management point: the losses can be compensated => the unprofitable positions has to be liquidated, and the new ones has to be opened in the oposite direction.

                Comment


                • #9
                  Re: MoneyManagement material

                  Hello,

                  It took me a long time to find a good MM plan and I had many losses before I found out that your exit strategy is the most important part of trading. At least in my opinion. This is my favorite MM material. I forget where I got it from but it is the material that has stuck with me.

                  Risk and money management, or the art of position sizing, is an important part of your forex trading as you’ll soon find out..

                  In any system, you’ll encounter both winning and losing trades. So you’ll want to be able to easily handle any losing trades, and continue to trade the winning trades at the same time, so that you have a profitable system.

                  That’s what forex money management is all about.

                  As an extreme example, if you put say a large chunk of your float into each trade without a position sizing model, and you make a profit, great, your profit will be much bigger than if you did have position sizing rules. So far so good. But if your next trade is a loss, you may lose your float, and that’s the end of the trading!

                  Let’s take a more realistic example.

                  Let’s say that your forex trading system has an 80% win-loss ratio, and that the size of your winning trades are on average 3 times that of your losing trades. This is your trading edge. This is why you can profit from your trading, whereas someone else who has no system, or is using an ineffective system, is unlikely to profit except out of pure luck.

                  But even with this trading edge, you may hit a string of losses.

                  So even with a good system, you still need to have an appropriate money management model to survive and prosper...

                  Let’s look into it a bit further.

                  Let’s say that you’re trading a cash float of $5000, leveraged up to $500 000, that is with 100:1 leverage. And let’s say that the maximum drawdown of your system historically is $2000, when following a particular money management method. So in this case, the drawdown is 40% of the cash float. Maximum historical drawdown refers to the biggest decrease in the cash float that has occurred in the past when backtesting or trading your system.

                  Now if you’re trading a good profitable system, then with the risk management rules that the system is designed to use, you can go on to make the profit that year that the system will generate. Say the system made 500% on your cash float that year. This means that by trading with that system, and its money management rules, you were then able to overcome this 40% loss, to end up 500% in profit.

                  That is, you rode through the drawdown period, continued trading and made this tidy profit.

                  And another reason to have appropriate money management is that in the beginning, you may make mistakes in your trading. So your losses in the beginning days may be higher than necessary.

                  That's why money management is important for any trading, including forex trading.

                  So let’s summarise these two crucial points so far:

                  1. Money management is important, as it lets you live to tell the tale, and profit well!

                  2. The performance of a system, in terms of profits, drawdown, or any other parameter you want to measure, depends on both the system itself and the money management rules it uses. A system should suggest a range of acceptible money management method or rules which gives best results, that is, good profits and an acceptable drawdown.

                  So how is money management done?

                  We’ve talked about why they are crucial, but what is an example of how you use them to actually calculate your trade sizes?

                  Let’s have a look at a method of money management that’s often used, called the percentage risk method.

                  Note that this is not the only method of risk management, and some systems do use a different risk method. But it is frequently used, and is good one for you to understand, so that you can then compare risk methods to each other.

                  Money Management Part 1: Percentage Risk Method
                  The percentage risk method as a money management method, aims to “risk” the same percentage of your cash float (not the same trade size) per trade. Note that you won’t have the same trade size for each trade necessarily.

                  This method relies on knowing:

                  1. The stop loss size of the trade, and

                  2. The percentage risk (of your unleveraged cash float), that you want to risk per trade.

                  So this percentage risk method says that there’ll be a certain percentage of your cash float that is at risk per trade. And to know how much is actually “at risk” in a specific trade, you need to know the above two parameters: the stop loss size for that trade, and the percentage risk that you’ve chosen.

                  As an example, let’s say that you’ve chosen a percentage risk of 2% of your cash float. If your cash float is $5000, this means that you’d want to risk 2% of $5000 per trade, which is $100. So with every trade, the maximum you’d lose (assuming no gapping or slippage) would be $100.

                  With this chosen percentage, it would take you 50 losses in a row before you’d lose all of your float (50 x 2% = 100%). Assuming that your system is a good one, then 50 losses in a row would be very unlikely.

                  If your system for example has an 80% win loss ratio, and that the maximum number of losses in a row historically was 7, then getting 50 losses in a row is very unlikely. The chances of this happening in fact is 0.2 to the power of 50, a very small number.

                  On the other hand, if the risk chosen was 4%, then it would take 25 rather than 50 losing trades in a row to lose the entire float. So as you can see, the number of losing trades required to lose the float decreases as you increase the percentage risk.

                  So now that we know how much is at risk per trade, how do we calculate our actual position size for a particular trade?

                  For currency pairs where the USD is the terms currency

                  Let's firstly take the situation where we're trading a currency pair where the USD is the terms currency, such as EURUSD, GBPUSD, AUDUSD. To work out our trade size (face value), you would need to know the stop loss size of the trade. So:

                  Assuming:

                  Cash float is $ 5000 USD
                  % risk is 2%
                  Risk per trade is $100 USD (500 x 0.02), and
                  We’re trading a currency pair where the USD is the terms currency

                  Face value (of base currency) =

                  risk per trade in $USD

                  stop loss size in $USD


                  So for example, if we’re trading the EURUSD, and the stop loss size for that trade was 30 pips, then our stop loss size would be equivalent to 30 pips in USD, because if you make a profit or loss, it is in the terms currency. Therefore:

                  Face value (of base currency) =

                  $100

                  $0.0030


                  Face value (of base currency) = 33 333

                  That is, 33 333 of the base currency, which in this example, is the EUR.

                  For currency pairs where the USD is not the terms currency

                  What happens if your float is in say $USD, but the USD is not the terms currency? This occurs when you’re trading the USDCAD, USDCHF, USDJPY for example.

                  In this case, you’d need to do an extra step, which is to adjust the stop loss size in the terms currency, to its value in $USD. That is:

                  Stop loss size in $USD pips =

                  Stop loss size in the terms currency (eg CAD, CHF, JPY) in pips

                  Price of the currency


                  For example, if you’re trading USDCHF , and the stop loss size was 55 pips, and the currency rate for this pair was 1.2878, then:

                  Stop loss size in $USD pips=

                  55

                  1.2878


                  Stop loss size in $USD pips = 43 USD pips.

                  You’d then use this number in the formula above to calculate your trade size or face value:

                  Face value (of base currency) = risk per trade in $USD / stop loss size in $USD

                  Face value (of base currency) = 100 / 0.0043

                  Face value (of base currency) = 23 255 USD.

                  Now, when looking at money management, also take into consideration your maximum number of open positions.

                  Position Sizing Part 2: Maximum Number Of Open Positions
                  A final point to consider would be the maximum number of open positions, that is the maximum number of trades that you want to be in at one time.

                  This is the other factor to decide when managing risk.

                  If for example, you chose a 2% risk, you may also say chose to be in a maximum of 4 positions at any one time. If all 4 of those positions close out at a loss on the same day, then you would have had an 8% decrease in your cash float that day.

                  This is a decision that you will have to make for yourself, though many systems will have a guide about this for you. In the beginning, your maximum number of open trades may depend on how well you know the system. You may find yourself starting with fewer trades on at the same time in the beginning, and considering a larger number as you get used to trading the system.

                  Forex Money Management: Putting It All Together
                  So putting it all together, all the way from how much float you have to how much profit is made from a trade...

                  As an example, let’s say that you had a cash float of $10 000 and so your leveraged float is $1 000 000, and you used the fixed % risk model.

                  For a trade where the stop loss size was 30 (terms currency) pips, and assuming a fixed % risk of say 3% (which is $300) of your cash float , your trade size in this trade would be 300/0.0030 = $100 000 worth of base currency.

                  If your profit was then 75 pips, then this would be $750 worth of the terms currency (as the face value traded was $100 000).

                  So there you have it.

                  An extra tip here for calculating the stop loss size:

                  Remember that when you’re looking at a chart, that you’re looking at the bid prices (most charts display bid, not offer, prices). Then as you set your stop loss, on many platforms, you have the choice of “stop if bid” or “stop if offered”. So say you were in a short trade, having entered at 1.2880, and your stop loss is at 1.2840. And according to your system rules, all stops are set as “stop is bid”.

                  When you’re stopped out, you’d be buying when the bid price reaches 1.2740 because you’ve used “stop if bid”. But because you buy at the offer, your actual buy price would be at say 1.2843, due to the spread. Your stop loss is therefore actually 37 pips, not 40 pips. A small point, but one which often causes confusion.

                  Comment


                  • #10
                    Re: MoneyManagement material

                    That's a lengthy post, but very informative. It'll take some time to understand the materials,
                    but it's worth it. Thanks.

                    Comment


                    • #11
                      Re: MoneyManagement material

                      money management is a key to success, even tho path is long we have to walk around each step

                      Comment


                      • #12
                        Re: MoneyManagement material

                        If you are a trader with a capital of USD 10 million. You are given a choice by God:
                        1. Trading with risk <2% for 5 years, more profits than losses, last equity USD 100 million.
                        2. Trading with risk <30% for 1 month, MC 5 times. Deposit last longer and equity USD 110 million.

                        Which do you prefer?

                        In my opinion, the best option is based on "your ability". So better to test your skills.

                        Comment


                        • #13
                          Re: MoneyManagement material

                          I simply say "Money management is 90 % of the forex"

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                          • #14
                            In metarader 4 demo account=$20000 for Micro size=0.1
                            in above's chart gave me direction go long 76 Lots at 0.8850 and Risk to Reward 4.2($1667 Profit) stop trigger 0.8803
                            and How to enter the trade order in metatrader 4 correctly?

                            thanks again...

                            Comment

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