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I'll get straight to the point. I think I have found a pretty good money management strategy.
And BTW, if you think that money management/psychology is a pretty dumb thing, you're probably not profitable at all because the key to being successful is not your strategies, but its your money management and psychology.
I'd say trading is 30% psychology, 60% money management 2% entries and 8% exits.
I'm sure almost all of you have heard the "risk #% of your capital per trade" money management strategy.
However, there are a lot of drawbacks onto this because if I were to win 3%, then lose the next 3%, I would be at a loss because: 100 + 3% = 103, 103-3% = 99.91 and I have not even deducted off the spread nor commission from the balance.
It goes the same for the other way round, 100 - 3% = 96, 96 +3% = 98.88. And we have yet to deduct off spread and comission.
Now I have found, what I think the best money management strategy out there and I think it would help those of you who are starting out and new to trading.
I do not want to make this a lengthy thread and shall then skip the elaboration on why is this a very good money management as compared to the previous.
Fixed ratio money management.
Current capital + (200 pips X current lot) = Next capital
$1000 + ( 200 * 0.1) = $1200
Hence once I reached $200, I would progress on to 0.2 lots( 0.1 + 0.1 = 0.2)
$1200 + ( 200 * 0.2) = $1600.
$1600 + ( 200 * 0.3) = $2200.
As you can see, you are earning a fixed amt of pips each time before proceeding to increase your position sizing.
The amt of pips earned each time before you upgrade to the next lot size is decided by yourself based on how conservative you are.
If you are more aggressive, decrease it.
If you are more conservative, Increase it.
Note that the lesser it is, it may be true that it will take you less amt of pips to "upgrade" however your stop losses are also more tighter because it will also take lesser amt of pips before pushing you back down one level.
And if you do happen to make losses, you'll go back to the previous lot size.
Here's a screenshot done on excel based on a 200 pips calculation
Now that we've got a good money management, all we need is to just bump up that win loss ratio and get an edge so as to increase the speed of when we will reach our 200 pips quota.
I guess you are talking about pips per lot as opposed to total pips?
So fixed ratio position sizing would be somewhere between fixed position sizing and fixed fractional position sizing.
Although you said, you don't want to turn this into a lengthy discussion, I think it would be interesting if you could elaborate a bit on the advantages of fixed ratio position sizing over the others....
Everyday you're earning 20 pips, by 2 weeks, you've reached that 200 pips quota and hence reached that desired balance of $1200.
At $1200, you start trading with 0.2,
Same thing, everyday you earn 20 pips, by 2 weeks, you've reached 200 pips, hence earning $2 ( $2 per pip) * 200 = 400. Hence total balance now is $1200 + 400 = $1600.
Hence, same position sizing throughout, and only increasing it once you've earned 200 pips or decreasing it once you've lost 100 pips.
The equation helps in a way that some people are not able to keep track of how many pips that have earned so far, so its much easier to take note that "Once my balance is xxxx, I would have probably earned 200 pips by now"
The pip size may vary according to how you like it, some people might prefer 500 pips. Before increasing as they have a higher stop loss and want to have less risk.
Please bear with me for writing too much. But its a very important topic that I really would like to stress on.
FIXED RATIO MONEY MANAGEMENT
Back when I was researching all of the different type of money management and getting frustrated at the various pros and cons, I ended up scrapping everything there was and developing my own. The method I developed is called Fixed Ratio Trading. Before I get into the logic of Fixed Ratio, let me review a few examples of what the Fixed Ratio money management method can do for systems like the ones you trade right now.
S&P Daytrading System.
Results trading just one contract were as follows:
# Trades 123
#Winners 67
#Losers 56
%Profitable 54%
Total net Profit $25,830
Avg. Trade $210
Largest DD 19%
As you can see, not the Holy Grail. But, apply the Fixed Ratio method to these results and over the same 123 trades, the increase is spectacular:
#Winners 67
#Losers 56
%Profitable 54%
Total Net Profit $204,000
Avg. trade $1,658
Largest DD 22%
A better than sevenfold increase in profits while only increasing the total drawdown by 3%! How about a position trading system in the Bonds?
#Trades 183
#Winners 115
#Losers 68
%Profitable 63%
Total net Profit $44,652
Avg. Trade $244
Largest DD 14%
With our fixed Ratio money management applied to the same 183 trades starting with one contract, results were as follows:
#Trades 183
#Winners 115
#Losers 68
%Profitable 63%
Total Net Profit $462,787
Avg. Trade $2,528
Largest DD 19%
A better than TEN FOLD increase in profits while only increasing the drawdown by 5%! Is this something you should apply to your trading?
Now, the method that I posted above is mainly for Forex, as it was in pips and that where 1 lot = $10 per pip and 0.1 lot = $1 per pip.
Another different calculation would be when you're trading in contracts.
it goes like this. I call the ratio between contracts traded to dollars required the "delta". This simply means "change". Depending on how aggressive or conservative you want to be, you simply change the delta in the following formula accordingly. A smaller delta is more aggressive while a larger delta is more conservative.
Current Balance + (#contracts * Delta) = next increase in contracts.
A $20,000 starting balance using a $5,000 delta would increase from 1 to 2 contracts once the account reached $25,000. To increase from 2 to 3 contracts, you would apply the same formula:
Current Balance = $25,000 + (2 contracts * $5,000) = $35,000. You would increase to 3 contracts once the account hit $35,000. This continues throughout your increases.
Further explanation can be found at the source stated.
Fixed ratio vs Fixed fractional in a coin simulation
Take a coin, toss it in the air 100 times. The ratio of heads to tails landing up should be very close to 50/50. If you were to win $2.00 every time the coin landed heads up and lose $1 every time heads landed face down, you should have won approximately $50 by the end of 100 tosses. This is a positive expectation situation.
The odds of you winning are heavily in your favor. We will further say you have $100 to bet with. The question is, what percentage of your money should you risk on each flip of the coin? What would you say is the best percentage to reinvest on each flip? 10% 25% 40% of 51%? This means that if you begin with $100 and choose to risk 10% of your capital on each flip, you begin by risking $10 on the first flip. If the coin lands heads up, you win $20. You would then risk $12 of the new $120 total on the next flip of the coin. If you lose, you lose $12 and if you win, you win $24 and so forth the game goes. Would it make a difference which % you used? If so, how much? Remember, you make twice as much when you win than when you lose. The odds of you winning are 50% every time. The answer may surprise you. By risking 10% of your money on each of the 100 flips (a $10 bet on the first flip) you will turn your $100 into $4,700! Money management increases your return from 50% to a 4700% return! Reinvesting 25% of your money would have turned $100 into $36,100! An increase of just 15% per toss increases your total return from 4700% to 36,100%. It looks like it gets better the more you invest. But wait. Increasing your risk another 15% every flip to a total of 40% being risked on each flip would turn your $100 into $4700.
This time by increasing your risk, your return dropped drastically. What if 51% of your money is invested? With this scenario, you actually lose money even though the odds are statistically in your favor. Your $100 decreases to $36. A loss of 64%. Our point? USING THE RIGHT OR WRONG MONEY MANAGEMENT CAN MAKE OR BREAK YOU!
Now for the illustration:
My PowerTrade S&P XT method made $39,500 based on a single contract from January 1st through the end of April this year. The worst drawdown hit $12,500. Using a delta of $5,000, profits were increased to $104,000 trading 6 contracts. This means that with a $2,000 single contract loss, the drawdown would be $12,000 or 11.5% of the profits. This, by the way, is not "the best" ratio to use in this scenario if you are looking for profitability.
Using the fixed fractional method, I optimized to find the VERY BEST fixed fraction to trade on this data set. If you will recall in the coin flipping illustration, risking 25% produced more profits than risking 10% or risking 40%. In fact, for that particular situation, risking 25% produced THE MOST profits of any fixed fraction. This is called "Optimal f". I used Optimal f with this illustration. The VERY BEST fixed fraction could only produce a total of $71,250 and it was trading 9 contracts at the end of that scenario. This means that a $2,000 loss per contract would result in an $18,000 drop, or 25% drawdown.
This means that the very best fixed fraction produced $32,000 less profits and was risking 13% more of those fewer profits with a single loss of $2,000. By the way, the best was 12% based on a $1,000 possible loss. 12% produced more profits than 11% and more profits than 13%.
Moral of the story, even if you were to use the optimal F for your system, even by chance you manage to find it, it would still earn you less as compared to the fixed ratio money management.
i recently changed my money management to something similar like this. i felt the fixed ratio wasn't working for me for some reason. i used to play poker so i changed risk per trade as moving up and down in levels just like poker. like you reach an X amount of buy-ins at the $100, you move up and give yourself a 5 buy-in risk before you move back down to whatever previous level you like (for example move back down to $75).
this helps keep me motivated and enjoy trading more as i move up in levels, it feels like i get a raise each time. of course i can move back down, but it helps with the mental aspect that i feel like i'm risking "free" money before i move back down a level. its just exactly like shot taking and you don't even have to stick to just one level. you can mix in a previous level with the current level you're at and play around with it.
Hi Nasdin94, thanks for the MM spreadsheet.. however I can't seem to open it on my excel. It says it is not in a recognizable format. I'm using Office XP
Hi,
Suppose my RR ratio is 1:2, means for the risk of 1$ i am targeting for 2$ profit.
Now as per urs money management technique, i am describing best scenario and worst scenario.
Starting cap: 100$
Total no of trade 11
Profitable 6
Loss 5
54.54%
After each 2$ profit I'll increase my lot size by 1.Means 102: I'll increase my lot size
(detail)
Trade-1:Loss:100-1=99
Trade-2:Loss:99-1=98
Trade-3:Loss:98-1=97
Trade-4:Loss:97-1=96
Trade-5:Loss:96-1=95
Trade-6:Profit:95+2=97
Trade-7:Profit:97+2=99
Trade-8:Profit99+2=101
Trade-9:Profit101+2=103
Trade-10:Profit:103+4=107
Trade-11:Profit:107+6=113
Final Profit=13%
Worst Case
===========
Trade-1:Profit 100+2=102(2nd lot added)
Trade-2:Profit 102+4=106(3rd and 4th lot added)
Trade-3:Profit106+8=114(7th lot added)
Trade-4:Profit114+14=128(14th lot added)
Trade-5:Profit128+28=156(28th lot added)
Trade-6:Profit156+56=212(56th lot added)
Trade-7:Loss 212-56=156(reduced 28 lots)
Trade-8:loss 156-28=128(reduced 14 lots)
Trade-9:Loss128-14=114(reduced 7 lots again)
Trade-10:Loss114-7=107(reduced 3 lots)
Trade-11:Loss107-4=103
3% profit - Brokerage of 11 trades - Tax ===??????
Concusion:It is Not good to increase lot size in b/w
