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Need help with Money Management
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Need help with Money Management

  #11 (permalink)
Legendary Market Chamois
Chicago, IL
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ucacme View Post

I have been day trading futures (ES, 6E and CL) for about couple of years. It never worked out properly. I was changing my methodologies/strategies. I was doing 10, 20 or more number of trades to cover my losses and eventually was loosing more money.

Big thank you to BigMike and This forum has been very helpful. The Psychology webinars and related threads are helping me follow the right path. Since few months, I have been able to control the number of trades to only 3 per day. I am finally able to stick to a decent methodology (using price action) that might help me be successful in trading. I have been able to get some success with 70% for winning trades.
I use the below Chars for my trading:
-->For 6E and CL: 6 range chart (for trading) and 600 tick chart for trend.
-->For ES: 4 range chart (for trading) and 200 tick chart to look at trend.

But the main problem that I see is the risk: reward ratio. I have my target of 8 ticks and stop-loss of 16 ticks i.e risk:reward = 1:2. Currently I am trading 1 contract per trade.

Though I am able to get 70% winning trades, one or two bad days are reducing my profits. For example, I had a bad day today and lot most the profits that I gained in this week.

Will my risk:reward ratio work in long run??
Can anyone suggest any better ways that I can handle money management??


There is no simple answer for you that I can see. Trading as a discipline so multifaceted. What I can say is invest in yourself to a great extent. Keep learning here at FIO and maybe look into some of Van Tharp's work since your questions seem to centered on money management.

Van Tharp basically calls the concept of money management position sizing but he is talking about the same thing.

If you really mean you use a 200 tick chart on ES as a "trend" chart I would suggest changing it to a 240 min or daily chart or similar longer term chart. Just the normal market wiggles on a chart with that short of a time frame will take you out of the trade. Might be helpful to do a rotation study on ES using a 4 range (I feel this is way to small but that's just me) chart in Excel or something so you can get a good idea of it's behavior and see if those stop and target sizes are meaningful.

It seems to me from your stop and target sizes you have a smaller account. No problem, if you want to trade an instrument better suited to it. Examples might be micro lot spot FX where on most major pairs like EUR/USD (Fiber) GBP/USD (Sterling) AUD/USD (Aussie) USD/CAD (Loonie) etc etc you can trade a 1 lot micro and risk $0.10/pip. On ES you have to deal with not only going up against very experienced traders with boat loads of resources but $12.50/tick as well. That's 125 times the risk of micro lot spot FX. I would say learn and develop yourself creating the system that works for you with an instrument like these micros and once you have generated a lot of data about yourself and its a solid approach with a positive expectancy as @Big Mike pointed out then and only then increase your size.

A probability mind set is needed IMO to have success in trading. Probabilities are based on large amounts of data, huge. Even with a positive expectancy there will be streaks, long streaks possible, of losses as will as winners. What type of system can you create to notice these streaks and adjust you trading accordingly? (ie during a winning streak increase size during a losing streak decrease size.... might be an idea) This is normal and try as we might there is absolutely no way to avoid this.


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  #12 (permalink)
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bobwest View Post
Ouch. You've got some problems here.

First, the math is very much against you. You won't be able to succeed if the arithmetic doesn't work.

Suppose you can maintain a 70% success rate, and you have a target of 8 ticks and a stop of 16, as you said. After 10 trades, if you get 70% successes, you will have the following:

Wins: 7 trades x 8 ticks = +56.
Losses: 3 trades x 16 ticks = -48.

So you are up only 8 ticks, at best, after the 10 trades. Now, assume that, as is realistic, you have a tick of slippage on at least some of those trades (meaning, your stop won't really go off at 16, but will execute at 17), and allow for commissions, which you will have for every trade, and the 8 tick profit will vanish and become a loss.

So, basically, the idea of an 8 tick profit target and a 16 tick stop, with a 70% win rate (which is huge) is going to be suicide. You will, over time, lose everything.

We have actually just calculated your expectancy, which is much more important than win rate, as mentioned by @Big Mike. Expectancy is the amount of profit or loss per trade that you can expect to have over a period of time, given your win rate and your average profit and loss.

You calculate expectancy this way:

Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss)

So here are your (hypothetical) numbers, based on your examples:

Expectancy = (.70 times 8 ticks) - (.30 times 16 ticks) = .56 - .48 = .8 ticks per trade, or 8 ticks per 10 trades, as we just calculated. This is very thin.

Subtract slippage and commissions, and you're negative. The point is that even with a very high win rate, you are either just on the edge of disaster, or over the edge.


What's causing that? Clearly, the very small assumed profit (8 ticks) and the larger loss (16 ticks). If you cut your profits this short and let your losses run this far, it will not work out. No variation on this theme will fix this.

More importantly, it's a loser's game to go for these very small profits. You give yourself no cushion or leeway for any losses, which will come. If you assign these types of stops and targets, you simply are going to have trouble staying positive. You will need to have much larger profits relative to your losses in order to stay above water.

One part of this issue is that having a very close target order in the market means that you will cut off your profit at that point. It may be comforting, and it may be rewarding emotionally, to take that money and put it into your pocket, but cutting it short so tightly will hurt you, as the calculations above show.

Another part of this issue is that going for such very, very small gains requires that, basically, you must be completely perfect, which no one can be. The reason this is a problem is that if you don't give yourself any leeway at all, if you don't have any cushion for your losses built up from your profits, you will not be able to outlast the bad times, which will come.


I would say that the fundamental issue is going after very small price movements. Based on several years of observation on this forum, there are a small number of traders who are consistently successful doing what is called "scalping." It's a very inexact term, but it does apply to the price ranges you have mentioned.

Most people who try it have failed. That doesn't mean that it's inherently an unworkable effort, but the very tight profit margins make it very hard to manage. You may see this from the calculations above. The very good scalpers are generally exceptionally accomplished, because they are doing something that few traders manage.

If you really want to exploit the opportunities that this kind of trading may offer, then, after thorough consideration, by all means go ahead and give it a shot. You should understand that it usually doesn't end well, however. So if you simply extend your profit horizons and don't let your losses get larger than your profits, you may have better success.

Last point: no one knows what anyone else "should" do. I don't know, therefore, what you should do, either. But there is a lot of material on this forum that you can draw on. Poke around, and see if anything appeals to you that does not involve the very short-term orientation of scalping small profits....

And good luck to you.


Thank you Bob. This is really helpful..

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  #13 (permalink)
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your math is wrong

@ucacme As others have so eloquently stated, your math is upside down and you're doomed to slowly bleed your account to failure.

What you're addressing here is a HUGE HUGE part of becoming profitable, which is getting the math right. This is the part that most people refuse/ignore/neglect to address in their trading system that has them spinning their wheels for years trying to find a more perfect entry, or a new indicator, or new trading system, or new guru trading room mentor. Basically taking on big losses and cutting their winners short.

As this article in Futuresmag points out, you can be theoretically profitable by even flipping a coin as long as the math is right.

Simple money management wins over time | Futures Magazine

I think Al Brooks mentioned somewhere that you need to be correct 90% or more with your reward to risk ratio is 1:2 and also if you're solely scalping. If you flip that reward to risk ratio to 2:1 you can be profitable even with about a 40% correctness in your trade.

So how do you get 2:1 reward to risk? Test. You might not be able to brag about the 70% stat anymore and it will probably go down near 40-50% but who cares. Profitable is profitable. Become profitable first, then start looking to hone your craft.

You're welcome, I just divulged my edge that took me years to figure out through my thick skull.

In trading, shortcuts lead to the longest path possible.
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  #14 (permalink)
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@fminus I tested my methodology for couple of weeks and went live. I was scalping and controlling the number of trades per day. (One of my main problems with me was that I was over-trading). But as most of them already have mentioned, I was wrong and started to see big losses when I had a bad day. The 70% profitability is from my trades for a month. But my expectancy was negative.

Now, I am working on changing my methodology to achieve 2:1 --> risk: reward ratio.

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  #15 (permalink)
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It's difficult to add much helpfully to Bob's outstanding post on the previous page (#8), but it strikes me that it may also be that trading a single lot is part of your difficulties, here.

If you're considering trading two lots instead (as you mentioned above), it may be that adding the second lot after the trade is moving into profit will help. This can result in your having larger positions, overall, when the odds are more in your favour, and having smaller positions when that's less certain. Adding to winning positions is often a very viable and productive technique.

It seems that you need to do plenty of research, however you look at it, to find out the long-term effect on your results of using either smaller stop-losses, larger take-profits, or a combination of the two.

In trading textbooks such as Van K. Tharp's Trade Your Way to Financial Freedom and Michael Harris's Profitability and Systematic Trading, the authors explain why methods with lower win-rates (e.g. 30-40%) are in practice often easier to make overall profits from than methods with win rates in the 60-70% range, or higher.

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  #16 (permalink)
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You also can't ignore a fundamental question of why 8 ticks?
Why 16 ticks?
Do you have an advantage using 8 ticks instead of 7 or 9? Volatility is not constant so it doesn't matter what volatility is, 8 ticks is best?

Multiple all that by the leverage you are using. Why use 10-1 leverage on 8 ticks vs 9-1 leverage on 9 ticks?

What is the sharpe ratio on your trades?

SPY 3 year trailing sharpe is 1.48. That is tough to beat and quite good returns with leverage.

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