Importance of money managment

Discussion in 'Risk Management' started by gifropan, Jul 19, 2010.

  1. How vital is money management and position size. According to some pundits, money management alone can make the difference between sudcess and failure in trading. Isn't entry and correct trend identification as, or more, important. I think this is a very interesting topic for discussion and would really be interested in ET members' views.
  2. ronblack


    How importan is MM? It is as important to trading as tires are to a car.

    Keep in mind that if you just buy a set of high performance tires that won't get you too far, you will even have to carry them. You will need the rest of the hardware/software.

    I hope this answers somewhat your question. The real question is Martingale or Anti-Martingale, when and how?

    A couple free article:

    Fixed fractionla MM:

  3. Money management is important with it we can manage our low accounts to get some profits from it. Traders without management techniques can not make safety of their big account s . they loose a lot in market .
  4. Even George Soros, Warren Buffet made some bad trades.
    So who do you think you are to believe all your trades are going to be right?
    Hence the importance of money management and position sizing.
  5. I find it helps me to look at my system as having 3 components.

    1) the method which provides me entry signals. This must provide a certain minimum percentage of winners (the higher the better of course) otherwise I simply cannot be profitable.
    2) money management, which determines position size and how much I risk.
    3) trade management, which determines where I put my initial stop, when I move it to break even, when and how I trail the stop, when and how to add to the position, when and how to tighten the stop/close a winning trade. I prefer to use trailing stops rather than targets.

    (1) and (3) take up the most time.

    BTW, this is for swing trading.
  6. kut2k2


    Very vital. Every trader must answer three crucial questions.

    • when to enter a trade
    • how much to enter the trade (position sizing)
    • when to exit the trade

    It isn't a competition between these questions. All three must be addressed to have a successful trading system.
    It can but it usually doesn't. In order for MM to work, you must first have an edge. MM doesn't provide your edge, it has the potential to maximize it.

    Here is the typical asymmetric coinflip example:

    There is a 50% chance that you lose your bet ;
    there is a 50% chance that you win twice your bet.

    You have an edge aka positive expectation.

    E = .5(+2) + .5(-1)= +0.5

    If you decide to bet a constant absolute size, there's not much more to say. For each bet, you can expect to gain a return of 50% on average.

    But if you decide to bet a constant fraction of your betting account, suddenly you have choices that make a real difference in how fast your account grows. The betting fraction that maximizes your rate of growth is generally referred to as your Kelly fraction.

    For the given example, your Kelly fraction can be determined to be 0.25. That is, if you bet a constant 25% of your betting account in the asymmetric coinflip above, your betting account will grow the fastest.

    Now, if you were to bet twice your Kelly fraction (50%), your growth rate drops to zero. Your edge hasn't disappeared, but the increased risk from going beyond your Kelly fraction has neutralized your advantage.

    So position sizing is very important.
    They are all important. Like I said, this isn't a competition between different aspects of trading, what you want is a cooperation that maximizes your trading account.