Money Mangement

TradeOff · Apr 26, 2004

"Mendosa?" Well if the "regurgetated, modifed stuff from someone else" works so good... why don't YOU use it to make 100% to over 300% per year?

Since you're so *enlightened* maybe you can explain my system a little more clearly, hm..?

"Have a nice day."

to

Quote from bali_survivor:

Oh yeah? Proprietary? More like some regurgetated, modifed stuff from someone else.

quote from another website:

Money Management:
It's something that most people spend very little time on. The most important aspect of trading is not sexy, exciting, or easy to describe, so who would want to spend time on it?
Who cares if I have 8 losers in a row for $500.00 each? It might only take a few trades to make back my $4,000 and more.....

I would suggest a 1% parameter per trade. If you have a winning method, the only way you can lose is by running out of money. Why take the chance? Never risk more than 20% of your account on your total current trades (cumulative risk, remember, all of the trades you are in, can and at some time (!), will be losers)

Trade long term to cut down on the costs of slippage and commission. Roughly 20% of an average account is spent on those costs per year.

If you want to be more advanced, I would devise a sliding scale of initial risk that was quite small when the original starting capital is at risk and increases if one has profits over a self-chosen Mendosa line of acceptable returns. (ie At the beginning of the year or when down for the year while original capital is at risk, the risk would be .5%. Profits between 1-10% would be risked at a 1% rate. Between 10-20% 2% etc. The numbers used are
for example only.)

In a long term trading situation where the market often gets away from the stop creating unenviable situations, I suggest peeling off contracts, but never below 1, to smooth volatility. (i.e. $100,000 account. Buy 5 Silver at 5.00 on the entry signal. Original stop is 496, 1% risk. [Â¢470,0 - Â¢471,0 = $50] At the close several weeks later the price is 600, but the stop has only moved up to 580. The account is now worth $125,000, and the risk, close to stop, is $22,500 or 18.0%. My 'peel off level' is 3%, this is higher than initial risk because it is dealing with open profits. I can risk $3,750. The risk per contract is $1,000; therefore, I can only have 3 contracts. I cover two.)
This will smooth volatility without adversely affecting returns in the long run.
It will hurt returns in massively trending markets, which number one or two a year, but it will help returns on an 'average' move. It will cut the volatility by over 50%.

By combining the sliding scale of initial risk and a sliding peel off %, both per trade and depending on the initial risk, one will see that money management has much more to do with returns than entry exit decisions. However, the best money management in the world will not work if one's methods do not have an edge over the market.

Have a nice day
Peace

More...

OddTrader · Apr 26, 2004

http://members.aon.at/tips/moneyMan.htm

Q

Actually there are (at least) 2 steps to implement proper Money Management:

1) Bet sizing is the determination of what (fixed or non-fixed) fraction of a portfolio's total (or again fixed or non-fixed fraction) equity to risk on each trade expressed in Dollar-, Euro-, Yen-, or Swiss Franc-denominated currency values.

2) Position sizing, on the other hand, is the calculation of how many contracts I should hold in my position, once a trade entry is signaled which basically is a function of the BigPointValue (the number of dollars that a 1-point price move represents) and a rounding algorithm as the number of contracts/stocks can't be traded in fractions and must be cut down to a whole integer.

UQ

OddTrader · Apr 26, 2004

http://invest-faq.com/fiveminute
Q
Chapter 6: The World's Worst Trading Strategy

The next step down our road to investment success involves briefly reviewing the worst stock trading strategy I can imagine, a simple strategy known as Scale Trading.
UQ

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Money Mangement

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