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Quant analytics: Money Management: A Starting Point

(Last Updated On: September 25, 2011)

Quant analytics: Money Management: A Starting Point

We’ve been hearing again and again about the importance of applying money management to trading strategies, but we had no clue of how to put this into practice. It’s not one of those things you can google for a straightforward answer.

How to decide the volume to trade if there is nothing in our systems that determines which could be better trades than others? The fact that the previous trades have done good or bad doesn’t seem to help either. Increasing the volume as the account increases seems logical but doesn’t make enough of a plan…

So we finally came across an obvious concept: Why risk more on one trade than in the other if all trades seem to have similar probability of winning and expect similar earnings from each?
So in one trade, your initial stop loss is 300 points away. In the next, it is 100 points away. Seems obvious you should bet more volume in the second, right? Keep the risk constant on every trade, and as a % of your account size. Duh!
(account balance * risk percent) / distance to stop loss = lots to trade

Looks like a good starting point, we’ll apply it to our systems. If you happen to know about Money Management and want to give us your tips on this or discuss… go ahead and contact us or leave a comment!

Money Management: A starting pointblog.forexperiment.com

, have you seen this series of articles?http://www.tsresearchgroup.com/en/articles/public_20020402010830.php

 

Generally speaking, you should risk a similar percentage of your capital on every trade (assuming the same “edge”), but you can go much deeper than this.

If you want to really exercise your brain, read any of Ralph Vince’s books. He’s put a lot of time and thought into the subject. Google “Ed Thorp Kelly Criterion” for another (similar) perspective.

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You also have to layer expected drawdown into your calculations. When a particular strategy goes out of sync with the market it is expected to draw down. If you don’t take that into account your drawdown will eat too far into your account, making recovery too difficult.

Do you have backtest data showing historic drawdowns?

 

 

NOTE I now post my TRADING ALERTS into my personal FACEBOOK ACCOUNT and TWITTER. Don't worry as I don't post stupid cat videos or what I eat!

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