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I would like to suggest that money management incorporates everthing
suggested in Gwenn's post(see below) and more. Money management includes
anything that has an effect on your money :). For a mechanical trading
system this would include:
-What markets to trade
eg. you may follow 20 markets
-What systems to trade on each market.
eg. you may have 5 systems
-How much your willing to risk at one time for all markets(overall risk) -
account status (ie. current drawdown/profit etc for the account) will have
an effect on this (may wish to sharply cut back risk during a drawdown).
eg. when your account is doing well, you may risk 15% overall. When in a
drawdown you may cut this back to 10%
-How to proportion the overall risk to each system/market combination - may
consider recent performance of each system/market combination to rate them
to determine allocation.
eg. calculate the sharpe ratio or profit to drawdown ratio for the 100
system/market combinations. Choose best 5 and allocate 3% to each(assuming
15% overall risk).
-How many contracts for each system/market combination based on given risk
level(above point) - determine how many contracts you can trade and still be
within risk level using factors such as stop levels.
eg. if stop loss is $1000 from entry and $3500 is allocated to a
system/market combination, then 3 contracts should be traded.
-I consider other factors mentioned below such as exiting strategy as part
of a system.
Like most, I'm still learning about money management. What do people think
of this and how can it be improved?
Regards
Simon Trevor
>Just to make sure:
>- Money management means how many contracts you put on following which
strategy
>designed to calculate how many contracts should be put on.
>- Risk management, is the strategy dealing with losing streaks and drawdown
>handling.
>- Position management deals with knowing what to do with your position once
it's on:
>When to add, when to exit, why.
>- Entry strategy deals with finding a place to start a new position, and
may also
>deal with finding a place to add.
>- Exit strategy deals with finding a place to exit. One can subdivide in
strategies
>to exit losers, and one to exit winners, and one to exit if expected
conditions do
>not materialize.
>
>At least, that's how things are usually defined, so that two traders talk
about the
>same...
>
>Gwenn
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