Starting this thread to first by collecting the posts made by Smart Trade in other thread.
We can continue the disucssion on MM here … so that its easily available for others.
regards,
Prasun
Starting this thread to first by collecting the posts made by Smart Trade in other thread.
We can continue the disucssion on MM here … so that its easily available for others.
regards,
Prasun
Post by Smart_trade
Hello friends,
Wanted to write down a few thoughts on Position Sizing and Money Management and tried to start a new thread but could not as the site did not allow (may be I am not doing it correctly.) Before these thoughts vanish and I become lazy about writing them down,I am putting it in the next post and request the Moderators to shift the same to wherever they deem fit so that I can delete this post.
Thanks,
Smart_trade
Post by Smart_trade
IMPORTANCE OF MONEY MANAGEMENT,POSITION SIZING AND AMOUNT RISKED ON EACH TRADE
When a trader starts his journey towards trading mastery,he takes a most predictable path as under :
1) This time I lost but Next time it will be a sure thing : A novice trader takes a few trades,makes money on some,looses on some but soon he will encounters " mother of all losses" or a huge cripling loss. He waits and waits in a loosing position,even adds to it and then books losses when they become intolerable. This has happened to all….let us be be honest. And then he justifies that loss with various thing like bad Govt policies,bad newsflow,operators and the games they play,and finally his luck and promises that next time he will make a "sure thing,never fail" trade and this cycle continues.
2) Search of some investment Guru,Newsletter etc : The next step is search of some guru,investment newsletter,tips etc .But the gurus which are "hot" go cold after some time and our trader goes on in such of new Gurus and this cycle continues.
3) I search of Indicators and "holy Grail"system :The next stage is various indicators,RSI,MACD,Stockastics,William's R ,various timeframes,charting softwares,Metastock,Amibroker,Tradestation etc and search continues for an indicator which "always work". But this stage results into one realising that there is no such thing as "Holy Grail". All one needs is to have a competent system with positive mathematical expectation,back test and forward test the system or method ,have a good money management and position sizing built into the method and trade that method with discipline and confidence. This is the "Key to the Kingdom".
And from here our novice traders starts his journey towars trading mastery in real sense.
I am giving a small mm game which every trader must play to convince him that mm is the king. Where you enter,where you exit,how many trades you loose,how many won and finally trading method is least important. About the game…. in the next post.
Best Wishes,
Smart_trade
Posted by Manoj
Dear ST Sir,
Thanks a lot for very informative writeup on Risk and MM.
A little doubt…..Sorry for asking silly question ……..With the above example, if our starting capital is Rs.1,00,000 and assuming we are risking 25% on each trade , if we get 4 initial consecutive losses, our whole capital will get wiped out and we will be out of the Game. Am I correct here in understanding or missed something.Quote : "The final amount you will have is not dependent on the sequence of your winning/loosing trades,consecutuve looses,wins etc and final amount is over Rs 10,50,000/-"
I didn't understood about this part highlighted in bold.
Thanks and regards
Manoj
Post by Smart_trade
THE POSITION SIZING AND MM GAME
Make 40 small pieces of paper,on 20 write SUCCESS and on 20 write "FAIL" and fold them and pyt them in a glass bowl. Then ask a small child in the family to pick up each slip from the bowl and you read whether success or fail.
The sttarting capital is Rs 1,00,000/- and At each trade you will risk 25 % of the capital. If the trade is success,you make double the amount of money risked on a trade and if it is failure,you loose the amount risked on that trade. So for first trade your cum equity balance is Rs 1,00,000/- and the amount risked is 25000/- so if the slip says success,you make 25000*2 =50,000/- and your cum equity is 1,50,000/- now and on next trade you bet 25 % of 1,50,000/-. so go on like this till 40 trades are over.
The final amount you will have is not dependent on the sequence of your winning/loosing trades,consecutuve looses,wins etc and final amount is over Rs 10,50,000/- Dont believe me ? Try it out. I have spent 3 hrs on this game early in my career and tried coin toss,various sequence of alternate win/loss,10 losses and 10 wins in sequence etc…But the final wealth is same not enen a rupee more or rupee less.
What does this prove ? Have a competent system,backtest,have a good mm and trade with confidence. Our 60 min flow is a great method for this kind of wealth building…..Your sequence of losses and gains make no difference in ultimate results of building your wealth. Hope you enjoyed the game and learnt something from it…..
I am no way advocating risking 25% on every trade. This is just illustration because optimal f for this system is 25 %. But 25 % is way tooo high. Start with 1-2 % and put your profits to work for you….
Best Wishes,
Smart_trade
Posted by Beethoven
Great post ST,
Again whatever I have to say next may not be strictly relevant under this thread and can be shifted alongwith STs above 2 posts to a new thread if need be.
I am a new trader. I struggled from the vary basic. No one teaches trading which is a very strange thing in this profession. In all professions there are teachers and Gurus but here the teachers are of suspect quality who teach their own brand of trading which some times works and sometimes does not.
So essentially it becomes a self taught profession. Now all things about money management, psychology, etc are given in the books and can be applied without a guru but actual trading with a system requires some handholding otherwise the mistakes that we make can put many (and does so) out of business due to loss of capital.
So if you learn before you loose your capital then you have survived. Very few people can do that.
Now there are many systems — we were lucky that Saint took time out to teach us and hold our hands thru many unseen pitfall even though we knew all the rules by heart but actual trading was taught to us by him.
I am saying this because, I see, and am surprised that many traders who have been trading (do not know if successfully or not) for many years, are now following this method and are falling for the same mistakes that novices did.
What I have to say here is like any profession a teacher/guru is a must. Saint is unique in this way that he has taught us actual trading and that too free and on this own free will.
Once you know a system, work at it till it becomes a second nature. The trading will become automatic.
I had lots of problems following the system and did things not as per the rules - suffered time and again - but now 60 min flow is like second nature to me. I will continue this. I tried 30 min mini flow also in between but that interfered with my main system of 60 min. I have left that. So one system till I completely assimilate that into my pysche, style and MM.
I would also ask the newbies to try this out.
Read and keep track of all the systems Saint is teaching us — 30 min miniflow and ambush style but practice trading only one till you have nearly doubled your capital — that is the hall mark of your arrival as a trader on the scene.
A few thoughts.
Bee
Posted by Smart_trade
Dear Manoj,
The capital will not be zero after 4 consecutive losses an we are risking 25 % of the current equity in the account on each trade. So if first trade is a looser,you loose 25,000/- so now your equity balance is Rs 1,00,000- 25,000 = Rs 75,000/- so now on 2nd trade ,you bet 25% of 75,000/- so on and so forth.Take a paper and pencil…do the calculation…it is an eye opener…was atleast to me few years back.
So we have a system which is correct 50 % time and gives reward to risk ratio of 2:1…..so complete 40 trades ( 3 trades per month,that is the frequency of our 60 min trades) and after 40 trades your original capital of 1,00,000/- grows into a sum of over Rs 10,50,000/- ( actually it cones to 10,73,000/-)So making wealth by trading is not too difficult…we are making it difficult by not following correct method and mm principles….. Try it out…..
Best Wishes…
Smart_trade
Posted by manojkch
Thank You ST Sir! Now understood what you want to say. Really and excellent example of Risk and MM, Success ratio, Risk : Reward ratio. Your example gave me more confidence in my path to become a successful trader.
Thanks once again!Best Wishes
ManojPS : Sir, Can you guide me how to do attachment ( Size:160 KB ) in this Site. I Have a very good article on " How to develop / Essential elements of a trading Plan" which I think will be very useful to Novice traders as well as professional traders.
Posted by Smart_trade
Manoj,
I am very bad in these technical matters. May be some of our moderators will be able to help you. Look forward to reading the article you mentioned.Smart_trade
Posted by RajeshinFlow
Hello
A Money Management Game from Van Tharp.
Secrets of The Masters, Trading Simulation Game
Can download and play the first 3 levels for free.
Thanks