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>From documentation found at:
http://www.metastocktools.com/URSC/URSC.htm
http://www.metastocktools.com/MACDH/MACDHdiverg.htm
Money Management vs Risk Management
-----------------------------------
"Money management" is usually a label given to the fixed percentage
allocation of capital to each trade, such as the "place 2% of your
portfolio capital into each trade" general rule. If this process is
supposed to protect a trader's capital from risk, then obviously risk
needs to be added to the equation.
A fixed trade capital amount per trade (such as 2%) disregards the
fact that some trades (and trading strategies) are riskier than
others, and thus their capital needs to be reduced accordingly to
allow for this greater risk. Placing an equal % of capital into each
trade and disregarding different levels of risk, is analogous to
dividing one's wealth and placing equal amounts into each investment,
regardless of whether it is a safe interest-bearing account or a risky
lottery ticket.
The promise of "money management" is that it will protect a trader
from the risk of losing his trading capital. Not necessarily so - it
will probably just slow down the losing process.
Money Management is *not* Risk Management
-----------------------------------------
Typical Money Management strategies such as fixed trade allocation, do
not take capital risk into consideration.
Risk Management is not possible without measuring actual risk, and
adjusting exposed capital to it, at both trade and strategy levels.
Risk Management or correct capital allocation, is a major component of
the risk-adjusted profit indicator set in both the URSC tool-kit and
MACDH Divergence kit.
jose '-)
http://www.metastocktools.com
--- In equismetastock@xxxxxxxxxxxxxxx, "david" <dwei9361@xxx> wrote:
>
> If you have the facility to backtest it, with something like
> Tradesim, why not test it and see is these percentages work for your
> particular system ?
>
> Always test ... even if someone says something may be better or the
> other is rubbish, if you can't test that it is, most likely it is
> not, and even more likely is that you will not follow it.
>
> It is always easy to destroy something than build something.
>
> Regards
>
> Dave
>
>
>
> -----Original Message-----
> From: equismetastock@xxxxxxxxxxxxxxx [mailto:
> equismetastock@xxxxxxxxxxxxxxx]
> On Behalf Of Jose Silva
> Sent: Tuesday, 28 February 2006 11:53 AM
> To: equismetastock@xxxxxxxxxxxxxxx
> Subject: [EquisMetaStock Group] Re: Why 1~3% risks for investment ?
>
>> Many people use 1~3% risks for their investment, but does anyone
>> know why?
>
> No one knows what lurks in the minds of traders, otherwise we could
> preempt the public and become quite wealthy practically overnight.
> ;)
>
> I suspect that the main reasons for a fixed (1%~3%) trade capital
> allocation are based on a misunderstanding of risk, or an inability
> to measure and act on risk properly.
>
> The main reason for capital allocation (money management), is to
> control risk to some extent.
>
> Allocation of capital (i.e., exposure to risk), should be done on an
> individual security basis. That is, look at individual trade
> history for each security, and allocate x% of capital to it
> according to historical risk.
>
> For example, a risky/volatile stock may require caution and a
> smaller capital outlay, whereas a more stable/trending security with
> less historical risk, can cope with a larger trade size.
>
> In other words, don't allocate capital % on hearsay or fixed
> percentages. Be smarter, and allocate capital according to
> individual risk exposure.
>
> More on this in the current issue of MSTT.
> http://www.metastocktips.co.nz
>
>
> jose '-)
> http://www.metastocktools.com
>
>
>
>
> --- In equismetastock@xxxxxxxxxxxxxxx, chichungchoi <no_reply@>
> wrote:
>
> Many people use 1~3% risks for their investment, but does anyone
> know why? Does it have any approach to determine the risk level
> based on the performance of any strategy?
> Thank you in advance
> Eric
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