Very hypothetical. I was never able to reach beyond 2:1 with position trading. I prefer though taking smaller risks and trading more often than trading rarely and taking bigger risks. My problem is that I have a few very good startegies that have remained profitable for the last 10 years but they generate infrequent signals and I cannot take big chances. I am still working on a startegy that will be about 2.5:1 with a high frequency of trades.
Good thinking, and good points. If money management isn't an edge, there should be strategies out there that "work" over the long run by going all-in, all the time. That is simply possible, as most profitable strategies are found/ developed initially without considering money management aspect. Then we believe we've found an edge. However, the potential MaxDD would be most likely unacceptable. Then we need to design money management for controllling risk. Hence we may say money management is (a dependent) part of the overall edge. I would believe it is also possible that sometimes a very simple strategy (with absolutely minimum rules) can make money with very good money managment design. In this case due to the weighting and emphasis, naturally we may say the money management is the edge. Just 2 cents!
An edge in trading is just a signal or a technique that creates a trading strategy with positive expectancy. So, HFT is not an edge though there are edges in HFT that cannot be used by people with slower market connectivity. Similarly, zero-rate financing is not and edge... but lots of things suddenly become profitable when leverage costs nothing.
Money management doesn't create a statistical edge. It doesn't improve the efficiency of an approach, it can however become a huge liability if it's not approached with careful planning.
I like the way nodoji included the trader in the market/trader relationship. With respect to market considerations alone, a critical thinker gets one answer. When the trader, is allowed to be part of the consideration , a different reasoned result occurs. Traders "earn" by the cummulative result of aquiring knowledge and skills. This is recognizable by comparing their approach to the asymptote of the "market's offer". I liked the blackjack example here and, additionally, how the Vegas floor manager "announces" with his cricket. Poker is different since mostly the table is what is being played instead of the house, primarily. Money management is the trader's edge as he stalks the market. Money management is not connected to the market edge the trader has as defined by his plan and strategy. Money management comes down to applying "earnings" more than just when the deck is favorable. Money management is best applied to "earnings". Earnings acknowlege the trader's rights to amplify his money velocity. The essence of money management is the compound interest formula where money velocity is substituted for the interest rate. The exponent of the P&L curve is what matters. It grows by three things: the trader's right to apply profits he "earned with skill and knowledge; the effectiveness of "taking" the offer; and properly segmenting each segment of the offer. The trader is "told" WHEN he is allowed to "amplify" his participation. Profits are WHAT is allowable capital in terms of "amplification". Posessing the WHY is the thing that is used to "take" the offer. None of the above are in a plan or strategy (a future oriented view of things). All are found in actual performance and its iterative refinement. The P&L is a performance curve; it has an exponent. Try finding that exponent with any conventional money management measurements. There are many many ways to make money. People who do it well can explain how they do it; not many people can understand what they have heard. These experts know they have earned the rights; they know what they are being told at all times; they know they are seeing and perceiving the offer that is there to take. Money is just a vehicle. Money is just a commodity that is used to operate a machine that "extracts" the offer. Captal is a seed that turns on the machine. Profits are added to the machine. The machine is just operating to EXTRACT THE OFFER. If a trader is being told to get out of the market; he goes to the "off" setting. trading is only done in the "on" setting. Pregnancy doesn't describe trading since once its on it can't be turned off. This concept of trading to this or that extent is not a good understanding of the trader's uses of capital. Clothing it in terminology and measures of extent is irrational. The markets are efficient. They ae huge. They are orderly. Money changes hands in the markets. It is going away from some and going to others. The use of money is a trader issue. The trader uses money as a vehicle to make money. Most people say: "I'm only using some of my money to make money." Is some of your money broken?
Since I generally have two methods to enter and over 35 money management rules, I would have to say that how I manage the trade is extremely important. But I believe my "edge" is the years of backtesting my methods over ten plus years of data. Knowing what all the stats show "Edge" is different for everyone, but as years pass and one gains experience, your "edge" changes.
I have been attending a trading group that focuses on options. There is absolutely no discussion of money management in there--none. I have brought it up twice, and while people have been polite, they are not really interested in discussing it. Interestingly, only a few of the people in there seem to be repeaters. Otherwise there are a bunch of new people each time who don't show up the following time. I guess I know why.
I trade strictly commodity futures. What you descibe as money management I refer to as being properly leveraged. For me, it is the single most important aspect for trading commodity futures. I don't care if you follow ta or fundamental analysis, if you aren't leveraged properly, chances are your success is going to be limited. Most trading strategies focus on technicals or fundamentals which is fine but if they are not augmented but some sort of strategy that includes leveraging your position, you are missing out on an important part of futures trading. I traded as a local for many years, at times holding 20% of the open interest of a contract. The only way I could trade positions of this magnitude was to make sure I was leveraged properly. With the increased volatility (and increased margins) that commodities now offer,(witness corn over past week), being leveraged properly will mean the difference between profit and loss. Just my opinion. Regards, local
Actually, I created systems in amibroker based solely on some very basic buy and sell signal, and entirely predicated on the <b>position size</b>. Some of these systems on the S&P 500 stocks made 30% a year for 10 years. The frustrating thing was that when tested on a portfolio of Canadian stocks.. the edge was not nearly as significant. But IMO there is something out there, it just requires spending time on it.
just think it over. no 100% win trading system exit. Trades are executed in x% success (win) rate. You need to adjust your trading position to your acrual trading win/loss rate to avoid burned out and maximised profit. Money management more important then trading rules! I think, trading is a fotune only. But. if you burned out quickly and sharply you have no capital to remain to duoble/triple at a succesful treads. To be lucky mean to be prepared and well capitalized in the moment of fortune. Without MM your capital errodes before lucks turn your favour.