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LeeD

Registered: Feb 2008
Posts: 1765

09-27-10 12:07 PM

From wikipedia

Money management... deals with the question of how much risk a decision maker should take in situations where uncertainty is present. More precisely what percentage or what part of the decision maker's wealth should be put into risk in order to maximize the decision maker's utility function.

Money management gives practical advice among others for gambling and for stock trading as well.

From slot machine glossary

Money Management: Strategies a gambler uses to manage their bankroll. Techniques to avoid loosing the bank roll include: play only a percentage of winnings, divide the bankroll into different sessions, etc.

Do you consider money management (a part of) your trading edge?

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NoDoji

Registered: May 2008
Posts: 8107

09-27-10 01:17 PM

Yes, a large part.

The size traded preserves my account should I have back to back losing trades for a period of time.

The price at which I can place a "survivable" protective stop determines whether I put on a trade that's signaled.

The use of protective stops keeps my losses smaller than my minimum profit target (positive R:R ratio).

With this kind of money management your win rate over time can be a coin toss (50%) and you can still be profitable.

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risktaker

Registered: May 2004
Posts: 2616

09-27-10 01:22 PM

It helps you "persevere" but it's not an "edge".

If you have no edge/positive expectancy, money management will just make your bleeding a bit smoother and longer lasting.
Not sure if it's any less painful.

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intradaybill

Registered: Feb 2008
Posts: 2962

09-27-10 02:35 PM

Quote from LeeD:

Do you consider money management (a part of) your trading edge?

If your win rate and your profit factor do not result in a positive expectation then money management alone can do nothing to change that. However, certain forms of money management can affect the expectation. Inappropriate money managament can also cause ruin regardless of positive expectation. Thus, effective trading needs both, first a positive expectation and then good money management. Each is necessary but not sufficient. Both together are sufficient for consistent returns.

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MGJ

Registered: Jun 2006
Posts: 726

09-27-10 06:09 PM

Eckhardt Trading uses a proprietary position sizing (a/k/a "Money Management") algorithm which attempts to maximize Expected Utility, rather than the more conventional Fixed Fractional position sizing approach (which does not). They consider this part of their "edge". Link below.

http://www.elitetrader.com/vb/showt...&threadid=75851

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Scataphagos

Registered: Apr 2009
Posts: 9169

09-27-10 06:11 PM

Quote from LeeD:

From wikipedia

From slot machine glossary

Do you consider money management (a part of) your trading edge?

No. The only genuine edges are (1) front-running and (2) insider information... both illegal.

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