Money Management. How to deal losses safely?
Money management is the most important and strongest weapon in the trading system. Many professional traders gain consistently due to good money management while most of the traders fail because they don’t have reliable concept of money management. If you seriously want to avoid losses then you should realize the potential of your each dollar which you are going to risk. Key is to understanding how much can be gained on one trade and how much can be lost on one trade without affecting the ability to trade in the future. A good way for traders is to maximize the profits and minimize the losses and should manage their money in a proper disciplined way. They should realize that they are not in the casino.
One of the best money management methods used by many professional traders is to always risk a fixed percentage of your equity (e.g. 3%) per trade. By using this method a trader gradually increases a lot size in case of winning and decreases the lot size in case of losing. It all depends on your historical performance of profits and losses in your trading system. According to different trading systems, different outcomes can appear with different combination of profits and losses. Based on the trading system statistics we decide when to increase and when to decrease the volume of the trade.
Quote: “..Fixed logic Grids analysis is the door to fabulous riches, while money management is the key that opens that door
Mathematical Expectation/probability of a Trading System
Money management is used in Investment management and deals with the question of how much risk a trader should take in situations where uncertainty is existed. More importantly, it is a decision of the trader to put the certain amount of the account as a risk per trade to earn certain level of profits
in, stock and futures trading, money management plays an important and crucial role in every success of a trading system. Money management is deeply linked withprofit expectancy of any trade.
“Expectancy” which is the average amount you can expect to gain or lose per trade.
Expectancy = (Trading system Winning probability * Average Win) – (Trading system losing probability * Average Loss)
For example even if a trading system has 60% losing probability and only 40% winning probability of all the trades, then using money management a trader can adjust his average win substantially higher compared to his average loss in order to develop a profitable trading system. If he set his average win at around $400 per trade (this can be done using proper exit strategy) and managing or limiting the losses to around $100 per trade; the mathematical expectancy is around:
Expectancy = (Trading system Winning probability * Average Win) – (Trading system losing probability * Average Loss) Expectancy = (0.4 x 400) – (0.6 x 100)=$160 – $60 = $100 net average profit per trade (of course commissions are not included in the calculation).
Therefore the key to successful money management is maximizing every winning trades and minimizing losses (regardless whether you have winning or losing trading system, such as %Loss probability > %Win probability).
Any trading system with 50% accuracy has the expectancy equal to +1/2. This means you can expect to earn 50% of the amount that you risk per trade on average. If you risk 2% of your capital per trade then you can expect to earn 1% per trade (50% of 2%) on average. Negative mathematical expectation means you will lose your money over the long-term, no matter how small or big your positions are. Zero expectation means you can expect your account to fluctuate around breakeven forever. You should also realize that the outcome of any single trade is always random. There may be continuous profitable trades as well as continuous loss trades. It is, therefore, not practical to attach yourself too strongly – either emotionally or financially to the result of any one trade or a series of trades.
As with the trading system, you can receive protection from your own destructive trades by closely following your money management system. It will protect you from greed and pride (which always demand that you overtrade) when your system generates unusually large number of winning signals in a row. It will also protect you from trader paralysis (inability to open new positions) when your system goes through a losing streak because you will know that, as long as you risk a small fraction of your equity per each trade (as is set by your money management system) and use a currency trading system with positive mathematical expectation, no string of losses can wipe out your trading account.
Long story short, when you design a trading system you should put a lot of focus in the long term analysis of your strategy and how the market is being entered. How much money is risked per trade? How are the exits set up? What internal exit mechanisms reduce loses? How can the potential of profitable trades be maximized? Etc. Having answers to these questions and understanding that money management is the cornerstone of a long term profitable strategy will probably allow you to develop much more effective, simple and really working trading strategies.
Most worst & most flopped money management systems
In this trading world there are following two money management systems which are seriously bad and can destroy account within a day or even less time. I am wonder these are most common, most popular systems amongst the traders. There is high attraction in these systems for a short time but in long term it is most worst way to trade the account.
- Martingale (YOU SHOULD AVOID SERIOUSLY)
- Anti Martingale (YOU SHOULD AVOID SERIOUSLY)
Master Money Management concepts
Master money management concept is not a single element which you need to control. Basically it consists of the following management to get complete powerful concept of money management thoroughly
Basic Risk Management
As it concerns to FOREX and other financial sectors, risk broadly quantifies the uncertainties linked with an investment; risk management is the act of accepting or attempting to adjust those risks. Most risks linked with foreign exchange involve unexpected value fluctuations in the currency in which you are investing, or instability in its economy or government. To manage these risks, first identify them then determine the degree to which you can tolerate risky investments. Often, investors manage risk in foreign exchange trades by pairing risky currencies with more stable ones but I believe you should find mathematical solutions instead of other methods.
Liquidity Management and Availability of Funds to be Risked
With respect to FOREX, investors should monitor the available money with which an amount of currency can be bought or sold without affecting the market as a whole; this measure is called liquidity. FOREX market is the largest and most liquid market in the world. Considering liquidity importance is a key point to determine flow of market trends for professional money management.
Investment Management Based on historical statistics of the strategy
Managing an investment throughout its lifetime is very important when participating in the FOREX market because predefined calculated investment management according to historical gains and losses of any trading system. Proper investment management involves strong investments decision and constructing a balanced investment portfolio with them according to investors’ capability and possible risk factor. Pay attention to the currencies in which you invest and how their performance compares to other options.
Capital and Cash Flow Management to Utilize the Profits
Handling FOREX investments make sure to keep your operating elements of strategy in mind. Access to enough capital to execute trades is essential to profiting in FOREX. Managing capital and cash flow ensures your investments stay in pre defined limits. At different stages of trading account it is highly important to set parameters to utilize maximum of capital with lower risk. Treat trading and investing in FOREX like the practical business. Ensure that the investment is currently as profitable as possible given constraints, and then look for future opportunities to make consistent long term profits.
Mathematical & Statistical Money Management
Mathematical & statistical money management can be understood by proper presentation and elaboration because it has many aspects to determine profit and loss through different unique combinations gaining and losing. We brief this concept of money management in our seminars and face to face meeting. Most important point of our money management system is, when we face 7 trades in loss out of 10 still our trading account does not face 10% drawdown of the account while we have potential to gain even in this tough situation. It is so safe and professional but takes some longer times to produce the returns with lower risk. Spending the time to generate the returns is better than taking large risks to produce sharp gains. Contact the management to learn detailed and accurate concept of money management in our different seminars or by private meeting.