Do you consider money management an edge?

The question is a semantic one, so ithe answer doesnt really matter. Who cares if its an 'edge' or not.

Two posters need to wise up.

First, Random.Something (cant remember the correct name) should learn about what is legal and illegal in Vegas. Card counting, ace tracking, roulette wheel clocking are not illegal if no electronic or mechanical 'device' is used. However, all those techniques can (or could) give you a huge edge. Casinos can easily be beaten and are being beaten around the globe every day.

The other poster who stated 'only add to winning trades and not to losing trades' needs to explain the logic behind this comment because I dont think it stands up to any mathematical scrutiny whatsoever.

 

Money management can add to the strength of an edge.

Here is an interesting post in Michael Harris' blog blasting academics about their statistics. He also proves with one line of math that the common definition of an edge using the notion of expectancy reduces to the simple definition that an edge means profit factor > 1

http://www.priceactionlab.com/Blog/2010/12/what-is-a-trading-edge/

 

Is money management an edge – to actual trading…, being on the right side of price…, having more winning trades – no


Is money management an edge – to surviving…, having less draw down…, being able to dig out when necessary…, making maximum money – yes


They are two separate…, but very interdependent aspects of this business (my hand is not my arm – but neither is much use without the other)


imo of course


RN

 

The only way I could imagine money managment being an edge would be if it were to account for strings of losses with some sort of trend following strategy. The strategy would need to be highly accurate and throw an occasional loss...but never many losses in a row...

I have posted an EA in the EliteTrader EA Library sub-forum that uses the above and doubles trades that are with the trend.

Now if your question were to ask about "trade management"..a definate yes...

ES

 

I would go one step further that money management empowers an edge. Portfolios Sharpe Ratios can double or triple the Sharpe Ratio of its best components. And the reverse also holds. For example, grabbing after marginal trades can leave you cash-poor when a good trade comes.

Michael Harris's blog was interesting, as was the one that preceded it: http://www.priceactionlab.com/Blog/2010/11/the-bootstrap-method-for-hypothesis-testing/ I think that he goes too far, however, in rejecting the survivor bias argument concerning portfolio managers/tracking account.

The issue, in my mind, is really money management empowering an edge. If you had $10B to pay with like a major mutual fund family, you could put $1M on 10,000 tracking accounts. It is easy to argue how many would be in the top 90%, but honestly, how many would actually be profitable at all? How many would be consistently profitable? That is closer to the null-hypothesis.

If 95% of futures traders lose money each year and two losing years out of 10 are enough to disqualify a tracking account, then (0.05)^8 = 0.0000000000390625. That is only one in 25M tracking accounts would be worth publishing.

Of course, losing tracking accounts get pruned early. Perhaps one could paper-trade initially to start with 100k tracking accounts, but the hypothesis, that published money managers have no edge, doesn't fit the odds. Having a consistently successful track record for 10 years is just too unlikely. (Having an all-winning track record for three months against 10M systems tested is not, however, that unlikely.)

With that said, I have met professional traders (CTA/Hedge) who are much smarter and much more competent than the average trader, but I have also met professional money managers who I wouldn't trust to do my taxes. The existence of profitable dim-witted money managers tells me that there must be something to the structure in which they are trading. Although you can believe in the veracity of their "insider" market hype/talking points, but I prefer to ascribe their success to money management.

 

money management just means taking small losses and not let a small loss become a large loss..cutting losses and letting winners run.

many traders hold on to losing positions...AND adding to losing positions.

ie is maximum 10% loss on position or limit loss on position