Money Management help

At 2% of current equity, how many losers in a row does it take take to reach ruin?

Surely you can run this on an Excel sheet in less than 5 minutes? :smart:

I did and figured that 35 losses in a row would reduce the account to half the original capital; assuming that the dollar amount could be controlled that exactly on each trade, I doubt it. :(

I think a 50% loss of capital would be enough to qualify for RUIN? or at least cause enough to consider a change of trading strategy? :whistling
 
Thanks Snowman - my point was that if losses are strictly controlled to 2% of current equity, then, practicalities aside, no number of losers will get you to zero.

(0.98) ^ N > 0 for all N

Similar thing goes for 3%, 4%, 5% etc. Practically of course, you would stop at some point or reach minimum margin/lot size problems.

35 losers in a row would surely take a stupendous talent, and yet even with this, 50% equity remains. I wouldn't call that ruin - a setback, no doubt, but still perfectly recoverable.

Anyway, it is often said that 2% is the amount to risk per trade. I wonder where this figure comes from. Why not 1%, 5%, 10%?
 
Thanks Snowman - my point was that if losses are strictly controlled to 2% of current equity, then, practicalities aside, no number of losers will get you to zero.

Anyway, it is often said that 2% is the amount to risk per trade. I wonder where this figure comes from. Why not 1%, 5%, 10%?

New Forex traders need to spend the time thinking about and understanding how leverage works, as well as how news and economic data will affect their trading plan.

New forex traders coming from an equities background, who are used to trading a cash account, understand that the profit and loss of their account is correlated on a 1 to 1 basis to the Value at Risk (VAR). In other words, a 10% rise or decline in the price of the stock will result in a 10% gain or loss on the cash position in their account.

Government regulations overseeing the equities markets allow traders to borrow up to 50% (2 to 1) of the purchase price of their securities for overnight positions and 4 to 1 intraday. A 10% move in a stock with 2 to 1 leverage will result in a 20% gain or loss on the cash on cash position in the account. A 10% move intraday with 4 to 1 leverage would result in a 40% change in the cash on cash value of the account.

Since a Forex account can be leveraged 100 to 1, a 1% move in a fully leveraged position would create a 100% gain or loss of the cash on cash value in your account. For each of the leverage changes in the previous examples the risk associated with the position changes dramatically. With the increased leverage of Forex trading, your trade plan must be adjusted to account for a shorter time frame in which to react to market news and or price changes. You cannot be trading Forex like a poker player and go "all in"; the increased margin creates too great a magnified movement in your profit and loss.

One solution offered by many Forex traders is to incorporate into their Forex trading plan the 2% rule. No more than 2% of the account value becomes the maximum amount the trader is willing to risk on a trade. This 2% becomes your "Value at Risk" VAR or (.02*Account Value=VAR). The VAR is then divided by the pip value to determine how many pips it takes to hit your max loss. The number of pips is deducted/added to the price bought or sold to determine placement of the stop loss.

For instance an account value of $10,000.00 would risk $200.00 on any one trade. A currency pair with a pip value of $10.00 would have the stop loss 20 pips away from the entry price. This is an easy tool that many use to help define risk within their accounts. Many experts have their own solutions' to position sizing. Author Van Tharp has written an entire book: "Definitive guide to position sizing" that outlines his premise on the absolute importance of not overdoing leverage and using position sizing to meet your objectives. It is his belief that this ONE tool is one of the most valuable, if not the most valuable tool to add to your trading system.

Read the whole thing = http://www.tradingmarkets.com/.site/forex/how_to/articles/How-to-Avoid-the-Common-Pitfalls-in-Forex-Using-Pr-80119.cfm

And this was good reading today = http://www.marketwatch.com/story/how-i-lost-100000-trading-currencies-2010-09-23

You are on the internet - If you (google) search for it, you'll probably find it. :smart:
 
That just restates the rule and is silent on what is special about 2%.
 
Maybe I should try this googol [sic] thing, see if that has the answer.
 
I don't know much about this area yet, so take what I have to say with a pound of salt. But what I have read says keep the risk per trade small (2% is max). The risk I am talking about means purchase price - stop loss price x # of shares = the amount you are willing to risk. ie: if you risk 1% of your 100K account per trade and you are buying a stock at $100 with a $95.00 stop loss then you can buy 200 shares.
Position sizing (after doing the above) means that after the stock has gone up and you can raise your stop to break even (or a little better) you are now free to add to your position. You could add another 1% of your account to it or a bit less if you are conservative.

Once you have grown your account you could consider the gain in your account to be "market's money" and risk a higher percentage (say 2 or 3%) on that portion of the account. You would probably want to develop a spreadsheet to keep track of the different parts as well as your stops and current gains and losses.

An important part of your strategy is knowing how consistent your trading system is. Does it have large drawdown or small ones.

I have been reading "The Definitive Guide to Position Sizing" by Van Tharp and it goes gets into these areas in much greater detail than I could ever do. I believe it discuses FRPM. The book is expensive, but the argument is that position sizing is the key to big gains - more so than entries.
I come from the position that I want big gains with small drawdowns. After reading the book I came to the conclusion that entries are important too. What's really important is to have a system with a High SQN that will allow you to achieve the big gains and avoid large drawdowns. It's not easy and I don't have a high SQN system yet (I want one with an SQN of 5).

I'm, still trying to figure out a lot of things. I want to get it right before I loose any more money.
 
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