That's the most worthless advice about Money Management there is. That's like telling me to build an airplane from scratch and flying it over a cliff... There's a lot to learn about building and operating an airplane than practicing it... How do you expect me to practice flying, right now... duh...
I answer since you asked me to do so in private . Money Management is noble term for position sizing which is basically leverage. Leverage by definition is multiplication of the effect, positive or negative. In a casino game the player will vary this leverage with each bet and the sequences of variation defines the so-called "strategy". In a coin flipping game the expectancy will stay the same whatever "strategy" - sequence of variation of leverage including the so-called ANTIMARTINGALE RULE - that is to say ZERO if the coin is fair (which is reasonable to assume for a casino). Mathematically something that can give only ZERO EXPECTANCY whatever strategy is used is called MARTINGALE. Something that gives negative expectancy is SUPERMARTINGALE and positive expectancy is SUBMARTINGALE. I will detail later : as I said here http://www.elitetrader.com/vb/showthread.php?s=&threadid=26294&perpage=6&pagenumber=6 I will make a thread dedicated to martingale. Stock market is not exactly like flipping coin in a casino : it has advantage over the casino (that's why I never go to a casino whereas I am in stock market : casino is a martingale/supermartingale except if the casino is idiot whereas stock market can be a submartingale).
Thank you Harry. I look forward for the Martingale Thread. Very interesting thread about randomness. Some of you comments "Now although there is way to detect NON Randomness, there is no way to detect the opposite Randomness." If a discretionary trader wants to see if his return is NOT due to randomness, what does he do? Just check his past results? How large his sample of historical trades it should be? Check other statistical facts like drawdown? Also " If you find indice of NON Randomness you can say that the process is not random " How do you do this? I might lack the education to understand you here, ( I just had one course in statistics in college) Thanks again Hamb
Money Management works like a charm. My Method: 1) Risk/Reward ratio minimum 1:2 (I like 1:3 or more) 2) Do not risk more than 2% of your total capital. (This will give you the max number of shares to trade) If your method/system is solid, you will find minimal losses and good consistant profits. I have been applying this money management technique over the past 16 months and the results are excellent.
>If a discretionary trader wants to see if his return is NOT due to >randomness, what does he do? >Just check his past results? How large his sample of historical >trades it should be? One can write a book on the subject Maybe I will do so but in french not in english or would be too difficult for me . As short recipe nevertheless, if you want to know if your P/L has some chance to be over 50% without making any assumption about normal law - since you are a discretionary trader but even if you are not - you can use Tchebycheff to get an estimation. A numerical example is given - for a poll : http://www.elitetrader.com/vb/showthread.php?s=&postid=396656 Since the size of a sample is taken into account it doesn't matter how size you have. After that draw an histogram, if it ressembles a bell curve then you can refine Tchebicheff (there are some stat method to test the bell curve also). It's better to aggregate the data by day if you take many trades in the same day so as to erase independancy problem (If you are a trend follower, since trend to persist from day to day, it would be better to refine even further due to this problem but I won't enter into details it's too long). >Check other statistical facts like drawdown? Drawdown is more difficult to estimate because even if a distribution is normal the extreme doesn't follow a normal distribution. It is worse if the distribution is not normal. Some use Monte Carlo Simulation but it is not rigorous as they generally assume implictly some random law so you musn't trust Monte Carlo Software Vendors to do the good assumptions for you. It can give you an estimation but you must be very conservative in your input so as to avoid false confidence given by their simulations - it is that kind of false confidence that may explain the Chicago legend reported by Nassim Taleb, that a trader "made 8 million in eight years and lost 80 million in eight minutes"
Well, knowledge is important... But it's important that you don't curve fit your risk management model. It's equally dangerous as curve-fitting your system parameters.
Well said Bundle. The way I employ money management may have another trader throwing keyboards. The ONLY way I can trade is to set my risk at a max $ amount lost and gained and positions size appropriately. Always enveloping positions with stop loss / limit tgt. Psychologically I need to have many minor gains and tiny losses (never, ever take less than 2-1). I have a pretty good accuracy rate of 65+ but continually watch winners fly away after covering. Of course if I let them go my win loss rate would fall but % gains increase....thats the price I pay for needing to "ring the register". But it keeps me in the green and thats all that matters. Your psyche holds the key to profitable trading