I have been developing an automatic trading system for FX using FXCM API, and so far, based on backtesting on my local database from Sep to Dec 2006, achieve profit 40% in PIP (in term of qty of trades is almost 50%). Testing on EUR/USD and USD/JPY, no scalping, no news. One of friend tell me to use Money Management to reduce loss and to boost profit so the 40% in PIP can turn into profitable. What is Money Mangement actually? I concern that Money mgt may not be able to be automated, hopefully can. --------- Next week will start paper trade with FXCM for enhancing the stability of the system.
Money management can certainly be automated. Systems are about building an edge and exploiting that edge over time to produce a profit. Money management techniques help you do that by keeping your losses under control. There are various approaches, some of which state that you should increase your risk as you lose (<a href="http://en.wikipedia.org/wiki/Martingale_%28probability_theory%29">Martingale</a>) while others state that you should decrease your risk as you go into a losing streak (<a href="http://en.wikipedia.org/wiki/Anti-Martingale">Anti-Martingale</a>). There are all types of money management techniques. If you read the Market Wizards books you will find it surprising how many individuals indicate they are really in the risk management business, rather than the trading or investment business. There are various methods to the money management game and I suggest you apply one that fits your personality and capital levels. My personal belief is that money management is the tool that keeps you in the game. You will always hit a losing streak. Your reuqired capitalization is partly driven from what type of money management strategy you employ. Do you increase or decrease risk as you are losing or winning? A good discussion can be found at <a href="http://www.futurestech.com.au/Thoughts.htm#Asset%20Allocation">this website</a>. This is one individual's personal approach and he lays it out very clearly. It is not the only way to do it. Remember, find something that works for you, how you want to trade, and how much risk you can tolerate. Good trading! Louis