Early today I received a PM from one of my online buddy, asking about the money management we use in our trading. I agree that this topic is a very important aspect of trading.
We generally have 3 kinds of money management:
- Fix number of contract per trade. This is used for testing purpose, to provide a clear profile on the risk/reward ratio of a developed system.
- A fix gearing ratio. we mainly use this MM method for our live trading. We usually use a ratio of 10. For example, while trading a USD 20k account, we’ll trade the EURUSD with a 200k contract size. This might be translated as two standard lots in certain brokers, or 20 mini lots, or just a simple 200,000 unit when we trade with a non-lot broker like Oanda. When we trade an account with a system on two pairs, we would divide it equally between the pairs. In the example above, if we trade the system on a 20k account, and we’d like it trades on EURUSD, and EURGBP, and GBPUSD, and EURCHF, then we’ll trade them by 5 mini lots each. Sometimes we’ll use a bigger gearing ratio, but 20 is the maximum we could go. This will depends on the backtest result, particularly the maximum Drawdown, which we prefer to be no more than 30%.
- A certain %-age risk per trade. We have this kind of MM on several of our well-developed long term trend following systems. First, the stop losses are calculated based on some volatility measurement. Then the lot size is calculated based on this. Each trade would be assigned a maximum of 2% to 5% risk on the capital. When we trade several instrument on the same account, we would also divide the lot size equally between them.
There are many sources regarding this matter. Using an “Optimal F” should be interesting to be tested, as proposed by several authors. But to this date, none of our systems use this kind of MM. It’s a very interesting one, tho.
I hope this is clear. please spark more question if there’s anything else I could answer, or you might have some suggestions for me. Thanks in advance.
Meanwhile, I’ll have a cup of coffee.