Okay, so I have a simple system based on position trading. Actually - to be precise - its a very simple system. Now, to maximise the profitability, I need to ensure optimal money management. I (personally) believe that this is the key to turn any system into a consistently profitable one. Could someone provide me some good sources, links, references, books, etc. that cover this topic in depth? Thank you very much in advance.
You are confused. Money management will not turn your trading system into a consistently profitable one. The system must be consistently profitable and then a sound money management method can improve your return and help manage risk.
You can't. It's not even theoretically possible. All you can do is define the maximum downside you're willing to take for any given position, and for the portfolio as a whole (that's two independent levels), and stick to the rules like a drowning man hanging onto a life preserver.
What is so lazy about asking for GOOD sources? Am I also being lazy if - for example - I ask which trading seminar is worth attending? Do I have to attend all of them to then decide? I guess you have never taken a recommendation from another person then?
When you wrote this sentence: "I (personally) believe that this is the key to turn any system into a consistently profitable one.", people concluded that you were lost. What is exactly the problem you want to fix: is it to maximize profits or to turn a losing system to a winning system? You have to be more precise. Do not write something which you do not understand and which is wrong, as a true statement like you did. Reflect on what I wrote, and I will provide a few sentence on the role of money management.
I agree with the previous comments. Start with a profitable system. Then fine tune it with the risk and money management principals written in your trading plan. Because you have a very simple system you have 100s of books to choose from. Mentioning one will draw fire because we all have our trading styles and preferences. But here goes: âTrading your way to financial freedom by Van K. Tharpâ Tharp discusses the process of developing simple systems and simple risk and money management principles.
You might look into the Kelly formula. Ernest P. Chan has a section on it in his book: http://www.amazon.com/Quantitative-...bs_sr_1?ie=UTF8&s=books&qid=1230948282&sr=8-1
This is a myth. Optimal money management will not overcome the rake/house odds (commissions, market spikes, slippage, fees, mistakes, your time, etc. etc.). You have a real outperformance edge, or else you will lose a lot of money over time
There are as many of ways of entering as there are ways to better money management. I will name a few I use and perhaps others can add. 1) By backtesting my profitable trades, in my case 1000, I will see how many tics the trade went against me to find optimal risk. So if 90% of the profitable trades had risked 9 tics, I know that is the most I should use in the future. But if I use 11 tics instead of 9 tics, my bottom line starts going down, I know that 9 is better than 11. 2) How far does the market have to go so that I can place a "Breakeven Protective Stop," This time I will use my losing trades, in my case 1000, I will find how many trades went profitable before turning into a losing trade. One ES method I use I have found that 6 tics is right, so when price goes 6 tics, Ninja will move my Protective Stop(PS) from risk of 9 tics to entry price. 3) Again by checking my losing trades, I will check on average, how many tics the trade went but did not become a full profitable trade. What I am trying to find, when can I bump my Protective Stop up to lock in a little profit, so maybe at 8 tics, Ninja will move Stop again to Breakeven plus 2 tics. There maybe be several instances of moving the Protective stop to continue to lock in more profit. 4) Time stops, I have found that profitable trades for the most part in day trading, don't linger around where my entry is, so I developed "Time Stops" If after so many bars go by and the trade has not gotten to "Breakeven Stop," at one tic profit, "Breakeven Stop" is moved. 5) Extreme Risk Stop, If I am risking 9 tics, price goes to minus 8 tics, my only target is now entry price, I normally save myself 1-2 losses a day using this. 6) Volume Stops, Ninja and I am sure other platforms have a "Volume Trigger", very cool in heavier traded markets. If you say want to use a certain stop for exit, you can place a Protective Stop with Volume trigger of say 99. When price hits your stop and the number of bids (if you are long) are 475, that Stop is not activated until the bid side reaches 99 and then a market order is sent in. I have watched my Stop get hit over 50 times and not be filled cause of the Volume I select, but if set too low, slippage can occur. 7) Pattern stops, say I am long, Price makes double top and three highs occur within one tic of each other, I may get out or take partial profit. 8) Huge expansion bar Stops, ES makes a six point bar in one minute, my backtesting shows to me I should tighten my PS to just under that bar. 9) Huge expansion bar Inside bar, I may want to tighten PS to just under this Inside bar. 10) Huge Expansion bar on lite volume, I might want to just get out. 11) Pivot points are another area to possible take profit at. 12) Fib Retracement numbers are another possible area to take profit or tighten PS 13) Moving averages make good places to tighten PS. Say 9 EMA, either a touch of it or a close beyond the EMA. Or even a PS below the bar of the close on other side of 9 EMA. 14) Time profit bars, I will backtest on average, how many bars it takes to reach my targets and can close trade on conclusion of this time even if it did not make full target. These and others work from my backtesting for methods I use, but everyone must test out for themselves, different timeframes and styles. Will these alter a bad system into a good, that requires much backtesting. Much work. The getting in is easy, figuring the out is your profits. For me trading is just a numbers game, I keep placing trades, using same patterns, using same money management patterns/rules, I will profit is my mindset. I have become a trained monkey. I will have losses, a number of losses, just keep feeding in the orders, don't think, just hit the button. A losing trade is the end of one trade waiting for the next.