When it comes to Money Management most people are clueless as to what technique to use and what amount of risk to take on a per trade basis. This, first of all, stems from the fact that people don't know the system they are trading, they just blindly trade what they found on some forum or trade a system that someone said is profitable. This is not the way to become a successful trader in my opinion. I don't know it might just be me, but before I implement a new strategy in my trading plan I have to back test the crap out of it and ask myself a few key questions after all the back testing is done. First question is the most important, "Is it profitable over the last 3 years", second is, "Is it profitable with all the pairs in my portfolio?", third, "What is my largest drawdown in pips?", fourth, "How many loosing trades did I have during the largest drawdown?" and last but not least "What is my average looser?". Only after answering these questions would I even think of finding the best money management that suits my trading plan.
Now to answer the question in the title of the Thread, "Why choose Fixed Fractional Money Management?", the answer is simple... DON'T!!!! "Why not?!?!?" I can see being asked by everybody. The answer to this question is simple, "Fixed Fractional Money Management" doesn't promote growth at the beginning of the accounts life. Generally people start off with a $10,000 account risking 2% per trade, which translates into a 0.1 lot per position if you trade 2 positions per trade, which means to be able to trade 0.2 lots per position you need a minimum account size of $20,000, so you need to gain a whopping 10,000 pips to be able to increase in position size for the first time (by the way all the lot sizes and pip estimates are based on Forex trading).
So you can notice how slowly your account will grow at the beginning of your career. "But how can I grow my account faster without increasing risk?" well the straight up answer is you can't, but by increasing risk by a measly 1-1.5% you can grow your account much faster. "Yea but I can blow my account much easier than if I stick to the fixed 2% risk ratio" The answer is straight up NO! The thing that you need to understand is that if you have answered all the questions in the first paragraph, you must have chosen the right account size so that even if you incur your largest drawdown you will only loose at the most (and this is depending on your risk tolerance) 50% of your total account. So by using the Fixed Ratio Money Management style you might increase the risk from 50% to 60% of total account but you still won't blow it (the account that is lol) but the increase in account and position growth is worth it in my opinion.
Thanks for reading this post
hope it was helpful.
Now to answer the question in the title of the Thread, "Why choose Fixed Fractional Money Management?", the answer is simple... DON'T!!!! "Why not?!?!?" I can see being asked by everybody. The answer to this question is simple, "Fixed Fractional Money Management" doesn't promote growth at the beginning of the accounts life. Generally people start off with a $10,000 account risking 2% per trade, which translates into a 0.1 lot per position if you trade 2 positions per trade, which means to be able to trade 0.2 lots per position you need a minimum account size of $20,000, so you need to gain a whopping 10,000 pips to be able to increase in position size for the first time (by the way all the lot sizes and pip estimates are based on Forex trading).
So you can notice how slowly your account will grow at the beginning of your career. "But how can I grow my account faster without increasing risk?" well the straight up answer is you can't, but by increasing risk by a measly 1-1.5% you can grow your account much faster. "Yea but I can blow my account much easier than if I stick to the fixed 2% risk ratio" The answer is straight up NO! The thing that you need to understand is that if you have answered all the questions in the first paragraph, you must have chosen the right account size so that even if you incur your largest drawdown you will only loose at the most (and this is depending on your risk tolerance) 50% of your total account. So by using the Fixed Ratio Money Management style you might increase the risk from 50% to 60% of total account but you still won't blow it (the account that is lol) but the increase in account and position growth is worth it in my opinion.
Thanks for reading this post
hope it was helpful.
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