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Hi Scot,
Good post. I think that most people are unaware of money management and the
huge effect it can have on your account.
The following is just some discussion about the details of your MM model.
What I don't like about your model, is the way that everything depends on
intial capital. I know that you need some reference point to know how the
system is performing, but if your system does well in the first few years,
then your account will come to a stage where you will always be risking 6 %.
The percentage risked will no longer depend on the recent performance of the
system.
This may be what you want, but it's probably better to adjust the risk level
according to recent performance. If you are just using this model to get an
account established, then switching to another model once it has a good
return, that would be fine. Its going to take a while to get the account
going, but thats probably good if your starting with a new system untested
in real trading.
Regards
Simon Trevor
>MONEY MANAGEMENT
>
> I recently saw an experiment in which a $100,000 account was traded using
>various money management techniques. After 11 years of simulated trading
>using the same trade results, the final equity of the account ranged from
>$382,000 to over $640 million. That difference shows the power of money
>management.
>
> Does higher risk always mean higher return? No. Every trading system has
>an optimal risk level that will maximize returns (This number was written
>about by Ralph Vince.). Any risk level less than the optimal will
>obviously hurt returns; however, any amount over the optimal level will
>also HURT returns. You will create a situation in which you are risking
>more to make less. In fact a risk level can get high enough that the
>expected return becomes negative despite having a mathematically favorable
>proposition. (Take a $1,000 bankroll and a 6-5 coin toss proposition. If
>you risk more than 16% of your bankroll per toss, you will create a
>negative expectancy. Every proposition has a point at which the risk level
>gives it a negative expectancy.)
>
> I believe in starting one's risk model with a fixed percentage risk. My
>methodology tells me where to enter and where to exit a position, but my
>money management tells me how large position the position should be.
>Divide the amount risked per trade by the per contract risk as dictated by
>the entry and exit points. (I.e. risking 1% on a $25,000 account would be
>$250 per trade. If I had to risk 10 points at $5/point with $60/round turn
>commission and slippage, I would put on 2 contracts.) I recommend a very
>small initial percentage risk that increases as profits grow during the
>year (or other time frame) until reaching the area of the optimal number.
>Example-I want to increase my risk at five different profit levels (up
>10%-20% etc. or whatever). My optimal risk is 6%. Risk less than 1% until
>no starting equity is at risk. Then move the risk to 1%. I now have five
>jumps to move from 1% to 6%, so I will increase my risk by 43% at each
>level until I reach my 6%. My risk level will move like this 1% to 1.43%
>to 2.04% to 2.92% to 4.18% to 5.98%. (The equity should be figured as cash
>in the account plus LOCKED in profits minus equity at risk in other trades.
> You are assuming that every open position is stopped out at its current
>stop.) Once the equity drops back below the profit level the lower risk is
>re-instated. This is a very aggressive model that is risky with profits
>but protective with original capital (A 50% drawdown requires a 100% return
>to get even; therefore, we want to be especially careful with original
>money.). The increase in risk; however, will geometrically increase the
>returns. Once this theory is in place, one can be aggressive or
>conservative by changing the various risk levels.
>
> I would rather have a marginally profitable methodology with perfect money
>management than a large market edge with poor money management. Improving
>one's money management will be more profitable than improving one's system.
>
>
>
>
>
_ .
Simon Trevor ,~' (_|\
s335159@xxxxxxxxxxxxxxxxx ,-' \
Manufacturing & Materials Engineering Student ( * <---Brisbane
The University of Queensland \ __ / Australia
\,~' "\__/
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