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Help me clear up some money management misconceptions.
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Help me clear up some money management misconceptions.

  #1 (permalink)
Elite Member
Spartanburg, SC, US
 
Futures Experience: Intermediate
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Help me clear up some money management misconceptions.

This is sort of a broad question, but here goes.

Am I mistaken by thinking that money management (trade management/lot sizes/etc) are much, much more important than actual trading methods or systems? I know people generally focus on signals for entries and exits, but it seems that if used effectively, money/trade management could almost be used as a sort of system in itself.

For example, could you not just find the historical range data for a given TF, where the range is measured from each successive higher high or lower low. It seems that if you found this data for multiple years, you could also calculate the historical range for any given hour of the day. Now obviously the actual ranges will vary from the historical ranges, but I'd assume there would be some significant level of correlation.

So with this historical range data, you could enter a trade at a higher high or lower low, and set your SL and TP according to what the historical range data says you can expect from this trade. In other words, if the historical range data shows that at 7PM the mean range is 11 pips, you wouldn't want to set your SL and TP at 30 pips.

And back to actual money management, you could also use this historical range data to help scale into trades.

I've just been looking at the "PriceActionSwing" indi, and it got me thinking about entering trades without a conventional "entry signal".

Sorry if this all sounds like rambling or doesn't make sense. It makes sense in my head...somewhat .

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  #2 (permalink)
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  #3 (permalink)
Market Wizard
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Ralph Vince, of the optimal-f fame, claims that 90% of a trader's performance is due to money management, with the remainder of performance due to the entry and exit signals.

Van Tharp always talks about a study that was done with a bunch of non-finance PhDs. All given the same positive expectancy trading system, almost all of them lost money in a simulation type contest. Reason: poor money management.

Concrete example: My latest Combine attempt, documented here, shows this point pretty well. I broke even, with some big swings, using varying position sizes. If I had kept position sizing small and constant (ie, no real money management), I would have ended with more profit, and less variation along the way.

I think most traders, myself included, do not focus enough on money management.

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread

Last edited by kevinkdog; July 31st, 2013 at 08:18 AM. Reason: clarified, corrected "positive"
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  #4 (permalink)
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You're on the right track, but the basic conundrum with pure money management based strategies is that there are more bars in the direction of the move so you are scaling at a disadvantaged price, e.g. if price is going up then you are either buying high on more bars or buying low on fewer bars. You can overcome some of the weaknesses through incrementing, decrementing, or adjusting the frequency of the scaling, but so far all of my efforts have still exhibited a bias toward either movement or chop, and extreme instances of the other will eventually wipe me out. Also unfortunately, I have found that extreme instances occur with sufficient frequency that doubling the account is not guaranteed before wipe outage occurs. Maybe you can do better

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