Lesson: 24 – Money management

2017-05-17 13:00    Amily

Lesson: 24 – Money management Education 1

Money management

The money management is to conduct a proper management of its capital trading. As simple as it seems this is a major problem that novice traders meet. Beginners often too much emphasis to the analysis. However, the true purpose of trading is not to be right, it is primarily to get to make money in forex over the long term. And for that you have to put all weapons for its part, money management is an integral part.

What is money managment or the management of its capital?

The principle of money management is to determine the amount of money you will use to open a position. This approach is directly related to risk management, which is to choose the risk that you will incur a position.

What is the risk managment or risk management?

We'll see a little chart that could change his mind the skeptics and the unconcerned.In this table, we see two columns, one showing the drawdown and another conversion.The drawdown is the maximum fall on your capital have suffered, clear the biggest loss on a series of trades.The conversion is the performance needed to clear a drawdown. So after losing 10% is going to require 11.1% to return to previous capital drawdown.After reading this table, it is clear that suffer a 25% loss greater ask hard to be caught.

How to avoid big losses phases?
It's not very complicated, just to manage its risk position. Obviously if you take a 5% risk per trade and you are trading 5 to 10 times a day you risk a big potential drawdown.

How to calculate the risk?

Lesson: 24 – Money management Education 2

Lesson: 24 – Money management Education 3

In this example, let's say you walk with a mini lot, ie with 10,000 currency units and that we have an account of € 10,000. We go to 1.31 and poses a StopLoss 1.24. Our risk is therefore (((1,31-1,24) * 10000) / 10000) * 100 = 7%

7% is a lot, but this is only an example to illustrate the calculation formula. Usually we avoid exceeding the 3% risk per trade.

How to control risks in Forex
The important thing is to know its control risk. Account size and the size of the batches used are a factor that can push to catch excessive risks. We'll see two tables to highlight the risks for the same situations but for positions of a micro-batch former, then a mini-lot:

Here one already notices that a capital of 100 € on a micro lot account involves significant risk taking for stoploss of 50 pips. With an account of such a small size it is best to trade with stops 20 pips. However an account of larger size such as € 2,000 you can manage so very safe for 50 pips since your minimum risk is 0.25%, which is low.

We retain after reading this table it is better to trade with a lower lever 5 and over the account, the greater the choice of risk the trader is free.

Here it is another matter, often brokers offer accounts opened in minilots The minimum amount may be below € 1000. Do not open this type of account! Table This is quite explicit, the risk is too high, you can not correctly trader in these conditions.Now that we saw in the foundations we will see in detail some strategies known money management.

Different strategies of money managment

First, we will talk about the martingale. It is a method that made its appearance in casinos. It was then applied to the trading and often in automated trading.The principle of a martingale is simple: “The more I lose, I take more risk.” The idea is not silly because we play on probabilities. The idea is: “I have already lost, so I have more chance to win on my next trade, so I will increase the size of my position to cover my loss.”

In theory it's quite nice, however, even if the probability of losing everything is small it is still present. The backtests show that over short periods the strategy is interesting but long term it is unsustainable.

Here is how is a martingale strategy:

an initial risk

an acceleration factor

It is also elaborate systems on averages rather than strings of trades, ie if the average gain / loss of previous N trade (s) is good then is increased or decreased. The best known is called the TSSF: Trading System Safety Factor for managing numerous configurations, having said that the views of its complexity it is simpler to use on robots as discretionary trading.

We will see in detail how this famous TSSF. It's a little mathematical and theoretical but still understandable for everyone. Trying to be educational and to show a clear logic.First start with a simple equation, a system that achieves no gain or loss should answer this equality:mathematical introduction to TSSF (formula and calculation)

Lesson: 24 – Money management Education 4

The relative position of the performance of a system that curve we indicate its effectiveness, if one is over, the system is profitable, if one is below, the strategy is not good.Reading this graph is unambiguous, for example if our record on our system 40% winning trades, so it is necessary that the average gain over the average loss is greater than 1.5 to testify the good health of our strategy.

Zero return the curve may be sufficient to indicate the health status of our system, however in our security approach we distinguish a new curve. This is the safety curve, the safety curve.

The relationship allowing us to draw this curve is:

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Our zero return curve is blue and the safety curve is orange.Study and analyze the results with the strategy of 
The study of the performance of a system with these two curves is very interesting but it is difficult to draw a direct application in terms of money management. Since we can measure on N trades averaging a winning trade window on a losing trade and that we also have the percentage of winning.

trades then we can create a digital index judging the health of the system. This index number is the TSSF. It is obtained as follows:

Lesson: 24 – Money management Education 7

It is clear that the more TSSF is, the better the situation of our system. If TSSF moves below 1 then we are entering a dangerous zone and it still goes down then we will be losses zone.The real question is whether our system is placed in a safe area or in an area at risk, the TSSF and the position relative to the zero return curve and the safety curve gives a good indication. Here's how to adapt our money management strategy compared to the results obtained, various options available to you as we will see here:

Open a position with a strong leverage effect

Open a position without lever

Open a position whose size is directly proportional to TSSF

Do not open position

Here is a table listing the different possible configurations and recommendations at the trading. There are ten possible strategies ranked in descending order of aggressiveness:

Good risk management is critical to success in Forex

In conclusion of this course, it is reminiscent of the level of risk that we give each of its trades and the overall risk assumed by the trader. Poor money management strategy you can be fatal. However keep strict rules of money management to the advantage of covering problems related to emotional aspects of orders.

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