Money Management

[TheBramble]

A generic catch-all that gets bandied about as one of, if not THE key factor in successful trade execution and management.

What is it?

 

[Hotch]

A crock of ****.

 

[Shakone]

I always thought it was about how much you risk on trades, with any added rules about when to quit, or when to skip trades. For example, I'll risk 1% on a particular trade, never let more than 3% be at risk in total, and if I lose 3% I quit for the day, and if I gain 6% I quit for the day etc.

But it seems from reading others posts that some consider it to have something to do with how you exit, stop placement, trailing stops, taking profits. I may be in the minority here.

 

[TheBramble]

A crock of ****.

Always good to get a balance. LOL

So Hotch, on the basis you just might be serious, you don't apply ANY Money Management at all?

What, do you just randomly go into trades with random amounts of trading capital and random stoploss levels and random exits? You don't think timing and value-for-money are components of successul trading?

 

[TheBramble]

Just to be clear. We’re not talking about the myth (incredibly, still believed in some quarters) that you can drop a competent trader into any position and through the magic of money management alone, he/she will turn a profit on it. This simply isn’t true.

What a competent trader will be able to do is assess fairly rapidly the viability of any position and decide whether to let it run, close it, add to it, unload a portion or hedge. By extension, this is precisely the position you find yourself in before you take any trade.

Money management is what competent traders use to [a] not lose money make money.

My purpose in starting this thread is to ask, what is it? Not textbook definitions that can be recited by rote. But real life, real traders’ actual implementations.

 

[TheBramble]

I always thought it was about how much you risk on trades, with any added rules about when to quit, or when to skip trades. For example, I'll risk 1% on a particular trade, never let more than 3% be at risk in total, and if I lose 3% I quit for the day, and if I gain 6% I quit for the day etc.

But it seems from reading others posts that some consider it to have something to do with how you exit, stop placement, trailing stops, taking profits. I may be in the minority here.

Position size, based on initial risk, as a function of total trading capital is one element of money management. Spot on.

As on ‘when to quit’ that comes under the heading of cutting losses and running profits, both equally woolly and generic terms. They get quoted a lot, but when you’re there looking at your live position, precisely what is cutting a loss; letting it hit your initial stop; assessing the changing dynamics of the market and instrument you’re in and deciding it ain’t as good a call as you initially thought?

And letting profits run is an equally glib phrase. You’re a pew pips/points up – and have been for the last 6 weeks…You don’t want to grab at pennies, but on the other hand, if you don’t have any set expectations of profit per unit time, when will you call it a day? Some would suggest that’s time management. It’s not. It’s money management.

The 1% per trade max 3% at any time are both examples of MM in practise. Wont suit everyone, but it is the empirical data I was hoping we could start to flush out in this thread.

I use an initial risk of 2% (used to be 1% for many years) and a 10% total exposure rule.

The cut losses/let profits run aspect is one that I imagine will get the most exposure for reasons that will be obvious. But I’ll also be championing my own favourite, timing:value for money.

 

[DionysusToast]

It is an interesting question because the anal will call some of your definition 'Trade Management".

Let's for an instance presume we live in a non-anal world and that Money Management can quite happily overlap other definitions of trading activitiy.

For me, I would define money management as the following:

1 - The process of evaluating how many contracts/shares/lots to put on a trade
2 - The process of scaling into and/or out of a trade
3 - The process of managing your stop loss intra-trade as a trade goes your way or goes against you

As you have rightly said Bramble - these things will by necessity involve at least some of the same sorts of analysis that got you into the trade in the first place.

 

[Hotch]

In all seriousness. I always thought money management as how much to risk per trade. It IS important.

However: I have never gone along with this 1% bullocks though.

It doesn't take a genius to work out that a bigger edge should have more risked to be efficient (which let's face it, is what we're aiming at, if it was just to make money we could put our accounts in the bank). Therefore, everyone should be risking different amounts, different systems should have different amounts etc.

I understand the 1% for beginners to preserve capital, but if your edge increases significantly, and you're consistent etc etc, you should be risking more, if you're not, I put it to you that either

a) you need to work on your psycology
or
b)you were risking far too much before your edge increased.

If you have 2 systems, and you risk 1% on both of them per trade, and yet one has a much bigger edge then you're an idiot.

 

[Shakone]

The stop loss position is based on what I see on the chart. The position size based on my money management. I may cut the loss before the stop is hit, also based on what I see on the chart after entry. But plenty of times my stop is hit before I can exit for a smaller loss.

I don't regard cutting this loss early as money management, because as DT points out, I am anal, and because they are less connected with my MONEY and more connected with my trade, so that is all trade management to me.

The decision to risk 1% on a trade is a psychological one based on what I can reasonably handle. The decision to quit after losing X% in a day is also a psychological one based on my past experiences of going on tilt and blowing 50% of an account in a day. Not fun (though your live call thread brought back some memories). I realise that quitting after a certain % loss on a day is also an account stoploss, and I won't argue with anyone who considers a trailing stop to be money management etc.. That's their thing.

 

[TheBramble]

It is an interesting question because the anal will call some of your definition 'Trade Management"

We’re trading to make money.

You don’t need to read any Behavioural Finance to know that tyro traders will have an asymmetric view of their positions. Let’s say you take an outright directional and the volatility drops off. Forgetting other factors we may use to determine viability for now, Case A is you’re a few pips/cents up. Case B is you’re a few pips/cents down.

A tyro trader will feel differently about those two situations. He/she will likely be less willing to kill the losing position than close the profitable one.

A competent trader will be looking at time exposure (the risk of just having an open position over time) and earnings per unit time. He’ll close a position in either state for the single same reason. That the basis for getting into the trade no longer holds OR it has not delivered on schedule.

 

[Shakone]

If you have 2 systems, and you risk 1% on both of them per trade, and yet one has a much bigger edge then you're an idiot.

What if your edge is huge on a system with a 10% win rate, and small on a system with a 90% win rate. Should you risk more on the 10% win rate system? Risk of ruin comes in to this...

 

[Hotch]

Of course. Risk of ruin only comes into it if you risk too much. I'm not saying you should risk more than 1% on the 10% system, just more than you risk on the 90% system. Surely that's obvious?

 

[TheBramble]

However: I have never gone along with this 1% bullocks though.

It doesn't take a genius to work out that a bigger edge should have more risked to be efficient (which let's face it, is what we're aiming at, if it was just to make money we could put our accounts in the bank). Therefore, everyone should be risking different amounts, different systems should have different amounts etc.

I understand the 1% for beginners to preserve capital, but if your edge increases significantly, and you're consistent etc etc, you should be risking more, if you're not, I put it to you that either

a) you need to work on your psycology
or
b)you were risking far too much before your edge increased.

If you have 2 systems, and you risk 1% on both of them per trade, and yet one has a much bigger edge then you're an idiot.

I’m not a big fan of statistics and quantifying edge. Trading performance statistics tend to ‘congeal‘ early on in the run. Slightly more valid as you increasingly reduce the span of time over which you’re assessing them and move closer to present day performance, but even then, of questionable value.

I guess if you had more than one system with different edges (I wondering why would you trade any other than the best?) those comments would be quite valid. I don’t so they make no sense for my trading style.

Yeah, I’ve looked at ramping up my stake and been through all the good Kelly stuff (which BTW was based on signal:noise in telecommunications lines – and some think that makes it perfectly applicable to calculating trading positions size – LOL) and if I wind in my trading performance stats into any current model, sure I could (should?) be trading much bigger size.

But when I do ramp it up, I don’t get the same good ‘feel’ about running the trade and I’m less likely to stick to my rules. Tough one to quantify under a Money Management heading other than perhaps ‘level of comfort absolute amount at risk’.

I certainly consider myself a cautious trader and don’t plan to change. But on the other hand, who would you want working for you on your trading capital: A guy who delivers 100% returns with a 50% drawdown or a guy that delivers 10% returns with a 5% drawdown?

 

[Shakone]

Of course. Risk of ruin only comes into it if you risk too much. I'm not saying you should risk more than 1% on the 10% system, just more than you risk on the 90% system. Surely that's obvious?

Not obvious to me.

 

[Black Swan]

I always thought it was about how much you risk on trades, with any added rules about when to quit, or when to skip trades. For example, I'll risk 1% on a particular trade, never let more than 3% be at risk in total, and if I lose 3% I quit for the day, and if I gain 6% I quit for the day etc.
But it seems from reading others posts that some consider it to have something to do with how you exit, stop placement, trailing stops, taking profits. I may be in the minority here.

I used to use similar hard/fast rules, but found it's only applicable to forex day trading. I can be (technically) up to ten percent risked if in my swing pairs concurrently. That exposure would have freaked me out (even 12 months ago) but I honestly view it as nothing now as statistically the edge works, was close on ten percent down recently..briefly. Now some day traders might look at my risk and drop the bacon butty but I feel match hardened enough to take it on board.

It's not massive size, certainly enough to hurt if it all pukes on me. IMHO with swings and or position trades you have to accept that kind of risk to make it *work* - by working I mean getting a decent wage out of the job, month after month....

 

[Black Swan]

Position size, based on initial risk, as a function of total trading capital is one element of money management. Spot on.

As on ‘when to quit’ that comes under the heading of cutting losses and running profits, both equally woolly and generic terms. They get quoted a lot, but when you’re there looking at your live position, precisely what is cutting a loss; letting it hit your initial stop; assessing the changing dynamics of the market and instrument you’re in and deciding it ain’t as good a call as you initially thought?

And letting profits run is an equally glib phrase. You’re a pew pips/points up – and have been for the last 6 weeks…You don’t want to grab at pennies, but on the other hand, if you don’t have any set expectations of profit per unit time, when will you call it a day? Some would suggest that’s time management. It’s not. It’s money management.

The 1% per trade max 3% at any time are both examples of MM in practise. Wont suit everyone, but it is the empirical data I was hoping we could start to flush out in this thread.

I use an initial risk of 2% (used to be 1% for many years) and a 10% total exposure rule.

The cut losses/let profits run aspect is one that I imagine will get the most exposure for reasons that will be obvious. But I’ll also be championing my own favourite, timing:value for money.

Blimey, we're on the same page there...I'm not worthy..

 

[Trader333]

A competent trader will be looking at time exposure (the risk of just having an open position over time) and earnings per unit time. He’ll close a position in either state for the single same reason. That the basis for getting into the trade no longer holds OR it has not delivered on schedule.

Much of this depends on the time frame for the trade being taken. For day-trading I would not risk more than 1% of capital per trade but for swing or position trading I would risk considerably more.

who would you want working for you on your trading capital: A guy who delivers 100% returns with a 50% drawdown or a guy that delivers 10% returns with a 5% drawdown?

Again I would say that this depends on the time frame that the returns are given but a 10% return compounded will make you very wealthy and I would go for this option.


Paul

 

[DionysusToast]

Much of this depends on the time frame for the trade being taken. For day-trading I would not risk more than 1% of capital per trade but for swing or position trading I would risk considerably more.

So you'd give yourself more exposure with a trade you hold for a longer time period ?

 

[Trader333]

Yes because the reward potential and success rate is higher for my position trades than it is for day-trades.


Paul

 

[Hotch]

I’m not a big fan of statistics and quantifying edge. Trading performance statistics tend to ‘congeal‘ early on in the run. Slightly more valid as you increasingly reduce the span of time over which you’re assessing them and move closer to present day performance, but even then, of questionable value.

It's a given that your stats have to be correct.

I guess if you had more than one system with different edges (I wondering why would you trade any other than the best?) those comments would be quite valid. I don’t so they make no sense for my trading style.

More opportunities to trade. Spread your risk. 0% is a valid amount of risk to use, you're still using more on the better one.

Yeah, I’ve looked at ramping up my stake and been through all the good Kelly stuff (which BTW was based on signal:noise in telecommunications lines – and some think that makes it perfectly applicable to calculating trading positions size – LOL) and if I wind in my trading performance stats into any current model, sure I could (should?) be trading much bigger size.

It's not "some think", it's mathematically proven (fixed odds).

But when I do ramp it up, I don’t get the same good ‘feel’ about running the trade and I’m less likely to stick to my rules. Tough one to quantify under a Money Management heading other than perhaps ‘level of comfort absolute amount at risk’.

I never said use more risk, and you feeling comfortable is a different point (which I thought I addressed).

I certainly consider myself a cautious trader and don’t plan to change. But on the other hand, who would you want working for you on your trading capital: A guy who delivers 100% returns with a 50% drawdown or a guy that delivers 10% returns with a 5% drawdown?

You might actually be managing to get to the point :-0

Let's assume you're happy with this 10% return 5% drawdown. Now if you come across something which makes returns 5% and drawdowns 0.1% on 1% risk, are you going to increase your risk to get to 10% return with a 0.2% drawdown? Or are you going to continue to use your 10% system?

geez.