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Big Mike's simple money management rules


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Big Mike's simple money management rules

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  #1 (permalink)
 Big Mike 
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This forum (the Psychology and Money Management section) is underutilized and I really want to encourage fellow traders and futures.io (formerly BMT) members to give this area a lot of thought and share your money management plans.

Most traders do not spend nearly enough time thinking about their money management strategies.

For me, my motto is to never turn a winner into a loser. My money management is built around this goal.

I use a simple 2 or 3 target ATM. Risk:reward is always 1:1 at minimum. The initial stop is 8 ticks for all contracts on the ZN ($15 per tick). The first contract target is 8 ticks, the second contract is 12 ticks, and the third is a runner (if I am trading three).

Once the first target is met, the stop on the remaining contracts is moved to break even (entry price). This assures that the winner will not be turned into a loser. This is automatic in my ATM.

From there, I often move the stop up in a chase fashion. On my second contract this often results in a "stop" being hit, because I kept it tight.

But, my motto is never turn a winner into a loser -- and I would much rather take 6 ticks than 0 ticks. Don't try to be "right", in other words, don't try to get that last tick because you want to be right about it. Too many times you will gamble far too much for that last tick or two, and end up giving back all your profits (or worse).

Many people hesitate to employ this type of money management because they believe it leaves too much on the table. I may get tagged and only take 6 or 8 ticks out of a trade that runs for 6 or 8 points! But, a winner is a winner and you can't lose money if every trade is a winner.

I think the first goal of every trade should be to focus on not losing money. Making money is easier than it seems, the hard part is not turning those winning trades into losers.

Sure, you can overcompensate and have tiny winners and huge losers. That is not smart. You need to start with a 1:1 risk/reward ratio. Then the rest should happen pretty easily.

As you get better, you simply add more contracts and leave a couple of contracts on as a runner with a liberal stop so you can catch those bigger moves.

Mike

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  #2 (permalink)
 wh 
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simple and good without words. thanx

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 Poocher 
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"I think the first goal of every trade should be to focus on not losing money. "


I can never hear this too much. Very well thought out approach!

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 MXASJ 
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Max loss per position? Max daily loss? Max monthly loss?

I've been following Elder's 2% and 6% rules and it has kept me in the game since I went "live" in October 2008. A quiet month in the markets...

Max contracts per equity amount? I actually use a spreadsheet that looks at 2.5x 14-period ATR of the period I trade an instrument and my 2% rule, so in theory I'm trading fewer contracts of a volatile instrument then I am a less volatile instrument with the same amount of equity. That also means it can limit my trading periods... based on the equity I have dedicated to trading the ES, for example, my trading time frame is five minute charts... not 10 minute, not 30 minute.

Again all little money management rules that have been keeping me in the game while I learn more. I'm a very, very small guy. Goal is to be merely a small guy one year from now .

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  #5 (permalink)
systrader
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A while back I was reading the sales brochure for MTPredictor ( linky) and I really like how they do some of their money management. Similar to Elder's 2% rule etc. But what's neat is that they draw a line across the chart at each profit target. They also draw a line at the "initial risk" price (what you would have lost on your original stop loss).

I'm a very visual person, so having the profit targets on the chart may help me visualize things. For example, how long it's taking to reach the 1st target (if the trade is struggling to reach it, then maybe you take profits sooner or tighten your stop, if it hits your first target fast then maybe you let it run a little more??). Not sure, but though I would throw it out there for those who are visual traders.

I'll be following this thread closely

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  #6 (permalink)
 NMTrader 
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I agree with Systrader completely. As a matter of fact I utilize MTPredictor (EOD version) for short term trades mostly stocks at this time on my moms account. The one thing that it does teach you is that you do not need to have a high win rate to make money. Per my experience trading it I have a 40% win rate yet have a nice return at the end of each month. The risk to reward ratios are great and the best thing about it is that the software shows this information on your chart to help you decide if you want to trade it. I am in no way hawking this software but am using it to illustrate how risk/reward money management is crucial to your trading. It simply comes down to keeping your loses low and winners rolling!

My two cents worth....Besides I need to keep posting to get back in the Arcade...

Regards, NMTrader
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  #7 (permalink)
 Big Mike 
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I've made a new video which goes over my setups again and some of my trading rules and money management.



Mike

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  #8 (permalink)
 Big Mike 
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I just uploaded a video where I plead and beg fellow traders like yourself to work on your money management and not on your chart and indicators. The video talks about money management, psychology, indicators, and journals.

Hope you guys watch it and find it of use:


Mike

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 yuri 
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Hi Mike!
Mike can I get access to the VIP forum? and thank you for your last video on money management, I'm totally agree with you on this subject, especially after a month ago when I lost my account...you very right... it is a WAR

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 Big Mike 
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yuri View Post
Hi Mike!
Mike can I get access to the VIP forum? and thank you for your last video on money management, I'm totally agree with you on this subject, especially after a month ago when I lost my account...you very right... it is a WAR

yuri, as a VIP you already have access to it. It's on the main forum page near the bottom called "The Elite Circle".

Mike

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 Moondialman 
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Hi Mike,

Quick question about moving stops to b/e. Do folks do this to give the trade 'room' to move in their favour?

I ask because to me the entry price isn't b/e with the cost of the trade. I tend to move mine to +1 tick as a result, sometimes I get stopped out, but then again I didn't pay for the trade.

Too conservative?

Cheers,

MDM.

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 Big Mike 
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Moondialman View Post
Hi Mike,

Quick question about moving stops to b/e. Do folks do this to give the trade 'room' to move in their favour?

I ask because to me the entry price isn't b/e with the cost of the trade. I tend to move mine to +1 tick as a result, sometimes I get stopped out, but then again I didn't pay for the trade.

Too conservative?

Cheers,

MDM.

I do it so I don't turn a winner into a loser. It's more important to make money than to be "right", so holding out for that last tick or two on your target while leaving your stop alone doesn't make sense to me.

I agree, moving it to entry does not truly mean "break even" due to commissions. However, I use a different approach than most with this, I view commissions, data feed, my computer, platform, etc etc etc as costs of doing business and I account for these costs but do not bundle it in on each trade.

Mike

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 Moondialman 
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Hi Mike,

Thanks for clarifying, that makes more sense now.

I hadn't considered the option of bundling costs like that, it's interesting, will have a think about that for my 'Plan'.

Cheers,

MDM

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  #14 (permalink)
one53brooklane
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"For me, my motto is to never turn a winner into a loser. My money management is built around this goal."

Thanks Big Mike! This is one rule I need to be reminded of often.

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 Big Mike 
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Hmm, an old thread. I've changed some of my views since this thread was created, for instance I include commissions now in my net profit per trade but still exclude data feeds and platform charges.

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 jtrade 
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Big Mike View Post
I've changed some of my views since this thread was created...

Me too : I used to think that trading in multiples of 3 was optimal; then 4 (2 off @ 1:1 RR to "buy one's risk", 1 fixed target, 1 trail), but having spent last week on my annual ski vacation, gazing at the serene Alpine landscape & breathing that wonderful mountain air (clears the mind), sipping an Irish coffee every lunchtime (clouds the mind back up again), I am now attempting to approach this issue from a different angle.

This is what I propose :

2% account risk per trade;
Full winner = or > 2x full loser;
Goal to have at least 25% full winners and no more than 25% full losers, remaining 50% approx b/e (ie. a collection of small losers and trades that perhaps hit T1 then went back to b/e etc).

Sounds very achievable, doesn't it, but I think it will be VERY tough to change the conditioning of grabbing that early profit (+8 ticks for me on FDAX) ? There is an excellent post by cbratton which I think is in the Al Brooks thread that I found very inspiring in this regard.

So, say 40 trades / month (just two per morning)
10 x 2R = 20R
10 x -1R = -10R
20 x 0R = 0R

Total 10R pm

10R per month when R = 2% = 20 % ROA per month. Calc excludes comms for simplicity. Btw, I am accustomed to much higher win rates, so I hope the average trade, and therefore expectancy, will be considerably higher (but prior higher win rates also included very small winners).

What I am seeking is greater consistency of returns and whilst this is not only predicated by money and trade management, it is a very central part of the picture.

To implement the above, I am reviewing my entire day trading structrue, entries, exits and especially trade management (when to move stop to b/e and trail distance are very critical).

J.

Edit - I found the relevant para from cbratton's post :


Quoting 
On the profit targets, you must force yourself to be patient to wait for the targets to be hit, no panic or fear to take a small gain, because if you have small gains and small losses you will lose money or not make very much. Almost everyday I have +20 ticks in the profit on a trade and then the market reverses and I end with a 5 tick loss. So I ask myself why I don't go for a smaller profit, but I know if I did that then I would be like most people and then lose money. Also my R/R would be lower and I would have to be right more of the time. You must be patient, must have discipline to follow your plan. Before I became profitable I always went for a small target lets say 5-10 ticks, I was happy that I actually made money, then I had a couple of losses, even small losses it still hurt enough to turn the net profits into net losses. I think someone is always tempted to make the profit targets smaller and stops larger, when one should make there profit target larger and stops smaller.


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 tderrick 
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Mike

When I get in a trade I have a actual, physical target in mind. (S/R based)

At times, when price starts moving and breaks through a threshold and the trade is on, I will
place my stop below the PA. This usually leaves a stop that is larger than my target.

I can't stand to have my stop "in the battle zone" per se....


With my testing in TF this doesn't seem to be a problem yet, but I always say to myself
"Man this RR sucks"

I seem to be pretty good at judging these smallish targets, so my stops rarely get hit...
I average about a 1.5:1


I can't find any way around it. I don't like having to depend on a 15 tick target to offset my 15 tick stop.


This should be alright if I can stay above 75% winners don't you think??


AJ
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  #18 (permalink)
felixtjung
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Hey mike, no offense, but aren't we mixing "money management" with "Entry/Exit rule" here???

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 Trader.Jon 
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tderrick View Post
Mike

When I get in a trade I have a actual, physical target in mind. (S/R based)

This should be alright if I can stay above 75% winners don't you think??

Well, if you are willing to take unlimited risk at 95% winning rate you still have a potential of once having 3 losing days in a row that wipes out 60% of your account ... hmmm ...

OUCH

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 tderrick 
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tderrick View Post
Mike

When I get in a trade I have a actual, physical target in mind. (S/R based)

At times, when price starts moving and breaks through a threshold and the trade is on, I will
place my stop below the PA. This usually leaves a stop that is larger than my target.

I can't stand to have my stop "in the battle zone" per se....


With my testing in TF this doesn't seem to be a problem yet, but I always say to myself
"Man this RR sucks"

I seem to be pretty good at judging these smallish targets, so my stops rarely get hit...
I average about a 1.5:1


I can't find any way around it. I don't like having to depend on a 15 tick target to offset my 15 tick stop.


This should be alright if I can stay above 75% winners don't you think??


I have since modified the thinking mentioned above and come in line with a more conservative stance...


AJ
Nashville, Tennessee


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