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The other side of the equation is to capitalize when your luck is good
Designing good money management principles to a degree helps but our "success or failure" is having an aggressive approach toward selling but that isn’t enough. In designing a money management system, your first consideration should be how well it protects your capital should your run of bad luck continues. This should have been the next topic of the conversation.

Trading is a basic process
We all tend to overthink trading but when you strip back trading to the bare basics it's all about trading the price differential, catching trends, "knowing when to get in & when to get out". Money Management is how we divide our funds to make a series of bets. It also requires careful risk assessment, with the ability to execute a trading plan flawlessly.

Skate.
 
Putting it bluntly to trade successfully you have to develop a level of skill
Unfortunately, it takes effort & time to develop these skills but if you are an excellent risk manager you have a high probability of trading successfully. There are some traders who are extreme risk-takers without even knowing it. Those who don't practice good money management techniques also fall into this category.

Prudent "Money management"
Other than using a mathematical formula to decide the next bet level to some degree relies on a sharp "PositionScore" or in "English", a ranking method to decide which position to be entered. The objective of trading is to make a profit & to do this requires careful risk assessment, disciplined money management, & emotional control to execute a trading strategy flawlessly without hesitation.

Skate.
 
System design
Every system must have an entry condition, an exits condition & money management (position size) to help you achieve your objectives.

There are five components that should be the minimum in designing a trading system
1. An entry condition that triggers a "buy signal"
2. An Initial Stop Loss that can be wide or narrow to determine the amount you risked on each trade.
3. Have a defined "exit rule" a "Stale stop" when momentum slows & especially a "GTFO" filter when it all goes horribly wrong.
4. Money Management has to be major consideration right off the bat. (the size of your next bet counts)
5. Position Size Rules to manage the portfolio of trades generated by your trading system.

Skate.
 
I thought my time on the "soapbox" was finished for the day
I know if I excessively post or talk about Nick Rage it turns some readers off. So I try to limit the number of posts I make, otherwise, there would be no stopping me. As I've said numerous times before, reading only my views on trading can be unhealthy at times, that's why I appreciate when others make a contribution. An alternative point of view is always welcome, but being a "smart-arse" & making provocative comments, isn't.

I'll leave the last word to Nick
"It takes time to work on a trading plan & develop a strong trader's psychology. It is essential for every successful trader to learn more about money management, create & test other trading ideas thoroughly."

Skate.
 
Captain_Chaza said:
"We All Learn The Hard Way"
Unfortunately
"There is No Other Way"
View attachment 148631
Click to expand...
Oh God, you're still on with your negativity, Chazza!

@Skate , I'm doing a search now for 'money management'. Haven't found a definition yet, but I'll keep looking.

In post #7,683 you say money management is the same as position size, and I remember you saying your position size is fixed. Therefore, money management = $15000? Got to be more to it. Serious question - I'm not being fecetious.
 
Last edited:
ok, here we go. Post #983 on this thread if anyone else is interested. I have to say 'money management' is a phrase I've never used.

Seems people mean different things by it, but basically it means "everything you do other than finding the bar you're going to enter on!". Money management basically equates with system design. ie. Position size, max number of positions, stops, targets, scaling in/out and so on.
 
Gringotts Bank said:
ok, here we go. Post #983 on this thread if anyone else is interested. I have to say 'money management' is a phrase I've never used.
Click to expand...

The post @Gringotts Bank is referring to can be found here

Dump it Here

The common old index filter An index filter is your safety net as it will keep you from trading & it can be as simple as you want it to be. Example, when the index you are trading falls below a pre-set simple moving average the filter will turn off - your strategy should now stop generating any...
www.aussiestockforums.com

Gringotts Bank said:
[Money Management] Seems people mean different things by it
Click to expand...

@Gringotts Bank you are absolutely correct when you say "money management" seems to mean different things by it. But what I do know about money management is that it's vitally important to keep you in the game.

The importance of money management
In a nutshell, money management is a critical tactic that all traders must employ in order to preserve their capital.

Skate.
 
The problem with reading so many books
After a while, they all seem to blend into one. I remember reading this quote "Even a poor trading system could make money with good money management". As money management is so important in keeping you in the game I'll make a series of posts to explain what money management means to me.

Skate.
 
The impact of money management
It's hard to know where to start to explain why money management is so important. This one feature of a trading plan is partly responsible for keeping you in the game. For a better understanding of money management, it should not be viewed in singularity, because it's not just one function but a series of functions. Meaning, there are a few components that make up or go hand in hand using this terminology, so I'll just put things down as they come to me.

Money Management makes an impact on the bottom line
When starting out such things as the size of your account, allocation of funds & the amount of money committed to each trade (bet) impact the final result you will achieve. By managing risk & position size appropriately, traders can ensure that they are able to stay in the game for the long haul by capitalising on profitable trading opportunities.

Skate.
 
The objective of money management
Prudent position sizing (the number of bets in relation to your trading funds) will limit the risk to some degree while allowing you to aim to achieve as much growth as possible.

How do we do this?
It's simply increasing or decreasing the amount of each bet, I call this "pyramiding", others might call it by another name but in simple terms, it means all my available funds are allocated. The formula code that I use is the balance of my trading funds divided by the number of outstanding positions. That's my first option. Option (b) is to increase or decrease the number of bets allocated. (position size)

Skate.
 
Another aspect of money management is risk control
Setting a series of exit conditions with an initial trailing stop limits exposure, protecting your trading funds from large losses in short periods of time as @Captain_Chaza has highlighted in a recent post. Gaps down do catch you on the wrong side of the trade but that's just a fact of trading. But with the correct money management techniques, they can be reduced but not completely eliminated.

Varying the bet size
Additionally, by altering the next bet size you can take advantage of market conditions. At times the markets will give you lemons & at other times its lemonade. When the markets are going against you it is as simple as altering the size of your next trade ensuring you risk only a small percentage of your account. By doing this, traders can ensure that they don't lose too much money if their trade goes against them. But when the markets are roaring it's the reverse. Increasing the value of the next trade in the good times enables you to allocate all the closed profits, giving you a chance to compound the results.

Skate.
 
It's a fact of trading
Being presented with unlimited trading opportunities while having limited trading capital, obviously, something has to give. This means traders need to have a system of allocating trading capital to each market condition or market bias. (position sizing)

This brings me to "Position Sizing"
Position sizing is deciding how many bets you will have in relation to the funds available. Some use a series of different methods for this allocation but as @Gringotts Bank eluded to, I use a "fixed number" of positions when starting out using an equal dollar amount allocated to each bet.

Skate.
 
With open or closed profits the bet amount varies
The number of bets isn't altered just the dollar amount. Using this variation in my trading increases or decreases the amount allocated to the next bet. Doing so ensures every dollar (soldier) is put into the markets to fight the good fight. Using this method works for me as I find the correct position size (bet size) has the ability to lift trading to another level.

Position sizing techniques
This involves deciding how much to allocate per trade which determines how much risk that trade takes on. Position sizing is important because it allocates how much money is put into each position. It can be a fixed dollar amount that I use or it can be a "fixed fractional risk" a "fixed percentage of the portfolio equity" or any other allocation you can think up, it's really up to you & your appetite to risk.

Skate.
 
Being proportional
It's wise to keep the size of trades proportional to the amount of capital you have. If losses happen then as a trader you should think about reducing either the size of the next bet or altering the number of positions you are carrying to ensure your trading account doesn't deplete to zero.

A strategic money management plan
Having a plan allows you to exit a position when trading isn’t working & maximise the opportunities when it is. One of the most important skills is knowing how much to place on each bet. When on a losing streak, reduce. When on a winning streak, press harder but only when the odds of trading are in your favour. If you "cut your losses & let your profits run" is simple & effective.

Skate.
 
Money management rules are essential
It doesn't matter how you trade, money management rules are critical to the correct implementation of every trade. The profitability of a strategy depends on it.

You hear it all the time
"Don't drive through flooded roads" but to people listen?
"Traders should never invest more money than they can't afford to lose" but do they listen?

Skate.
 
In this game, it's critical that traders don't overreach
When profit targets are hit, close the trade & enjoy the gains. When in a losing trade follow the sell signals, don't try to outsmart your strategy. Just learn to be the best loser you can possibly be.

Accept the risks that come with trading
Nobody likes to lose money but traders must understand that it's all part of the journey.

Alternatives views are welcomed
When it comes to "money management" we all tend to do something different & this thread is the perfect place to voice an alternative, from your perspective.

When trading
Trade to the best of your ability. Don't "fuck_it_up".




It's time to hop off

Skate.
 
Glad you said that, because I think of 'pyramiding' as scaling-in. I was reading all your posts with a different understanding. Not sure what term I'd use for that process. I think Howard uses the term 'dynamic position sizing', although that may be something else entirely.
 
Gringotts Bank said:
Glad you said that, because I think of 'pyramiding' as scaling-in
Click to expand...

PositionSizing pyramiding
Okay, if @Gringotts Bank was confused with the terminology an explanation is in order. In essence, when I use the term "PositionSize Pyramiding" it is a way to calculate the size of my next bet. The weekly re-calculating takes advantage of the closed profits & accounting for closed losses.

"Pyramiding Explanation" (positionSize)
Pyramiding my positionSize is a re-balancing technique to vary my position sizes (my next series of bets) with the reinvestment of profits. By "Pyramiding (re-balancing) my PositionSizes" every dollar is put into the battle to fight the good fight.

Skate.
 
Position-sizing uses my trading cash balance
A Bank feed is sent to a parameter setting within the AFL strategy code. The re-balancing formula that I use is simple as it takes the cash balance of my trading account divided by the number of outstanding positions = my new "PositionSize". This will now be the new bet for each & every pending trade (the new PositionSize also calculates the number of shares to buy in the pre-auction)

What are the benefits of Pyramiding my PositionSizing
What metric do I use?, How do I measure how effective a strategy is using this method? Which of my systems will generate the most return? Which is better for real trading? These are very important questions that I need answers to because I'm a numbers man. I'm happy to report there’s a metric that helps answer all those questions.

Skate.
 
Deploying 100% of my trading funds
Pyramiding "PositionSize" is a re-balancing technique that I use for reinvestment of profits while at the same time reducing the size of my bets to acknowledge the losses. I value every dollar & you wouldn't expect me to deploy those dollars into the heat of battle without knowing the odds of winning the war, would you? When I put my funds into the markets I need to know the odds of them returning.

All my available funds need to be put to work
I should have also mentioned previously that "commission drag" has to be in this calculation to determine the next bet size. No one wants to be caught with their pants down by having insufficient funds to cover those purchases.

Skate.
 
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