90% Analysis/10% Money Managment

[thekid 10]

Anyone else out there that goes by this?

[EatSleepTrade 10]

100% money management and 10% analysis.

Takes 110% to make it in the trading world.

[fxeconomist 11]

Anyone else out there that goes by this?

 

I'd give 50 or even more percent of importance to money management. Many traders lose because of incorrect money management even if their analysis is correct. You may have 5 profitable trades and then take risk and lose everything for one trade even your trading analysis was in 80% correct.

Just my two cents.

[zdo 20]

Kid,

 

Explore what you mean by "Money Management". One typically mistake is to subsume / conjoin 'risk management' and 'sizing' under MM and then try to use the very similar processing methods to ascertain both.

 

It’s system dependent - but generally if you know how to size correctly and if you know how to manage risk correctly then you hardly need ‘analysis’ at all - especially not the common analysis styles promulgated by the ‘voice of trading’. That bold assertion is further strengthened by the reality that for most systems the actual price action following (and trade result of) a signal generated by a high quality 'analysis' may turn out just fine one time and completely different the next... ie for identical signals, the market will invariably give you radically different results.

 

hth

 

zdo

[jpennybags 11]

The kid...

 

As zdo has pointed out... it is all system specific...

 

Not to get too deep in the weeds, but throughout my trading day, I'm constantly in a state of analysis (even when I'm in a trade). I will often take trades that I consider to be of higher initial risk than other trades (an assessment that goes on in my simple, and often flawed mind). I do this because (1) I'm skilled, and (2) you have to have money "on" to make money (risk). From that moment, I rely on trade management to control risk (again constant analysis). For me and my style of trading "trade management " is "risk management"... the two are not separable.

 

As to the term "money management", my position size is always the same. I trade on a very short time frame. For someone who trades on a longer time frame, scaling in and out of trades may make sense (there again; you are controlling risk... initial risk and tail end risk). If you have deep pockets, and are willing to take on the risk, then money management takes on a greater importance. For me "money management" doesn't really come in to play.

 

In the end it all comes down to controlling risk... and it is system specific. For me it's 100% analysis... every day, during the entire session.

[MightyMouse 12]

Kid,

 

The amount you put at risk in a single trade needs to be insignificant to either or both you and the amount of funds you commit to trading.

 

A really bad day trading should only impact you emotionally; financially, you should not lose >1% of the total funds you commit to trading. Size each trade accordingly. As you approach 1% in loses, stop trading for the day.

 

The above is just an example.

 

It is different if you are a long term trader/investor with multiple positions, but you are a day trader when you first enter a long term trade. With any trade you enter, long term or short term, long or short, start chopping the size of the trade if it gets red right away. You can always reenter lower or higher at a better or worse price.

 

Analysis Snalysis. It makes no difference which system you design. Eventually, any and every system will produce something. If so, then money management is nearly 100% of trading. You risk of ruin needs to be zero. If it is not, then eventually, you will get caught with your pants down. There are a lot of brilliant, knowledgeable traders who are broke, because the market did either what it shouldn't have done or what it had never done before.

[Emily291 10]

One typically mistake is to subsume / conjoin 'risk management' and 'sizing' under MM and then try to use the very similar processing methods to ascertain both.

 

zdo

 

What do you mean by this? All other things being equal, a larger position size means more risk doesn't it?

 

To me it seems that position sizing is how we control risk. Often people seem to confuse stop losses with 'managing risk', but that's nonsense - a trader might not use stop losses at all and yet still control risk.

[zdo 20]

MM succinctly said what I was basically trying to say ...

However, I will add to his “The above is just an example.” -

That 1% rule is basically a lazy beginner trick... ie if you continue to use that 1% rule, you’re sizing and risk management will be about as effective MM as is simple moving average signaling effective 'analysis' in the long term...both is looser  !

ie You need to engineer and fine tune your risk and sizing methods to your individual system(s) ... just like fuel injection,etc. need to be engineered and fine tuned to the engine it’s on top of, etc...

 

 

...

 

 

 

In my earlier post I encouraged Kid to explore what he meant by Money Management.

Now it’s time to encourage an exploration of what he meant by Analysis.

Typically Analysis is ‘entry’ dominant... yada yada the analysis born of the ‘voice of trading’ propaganda etc etc

BUT

The most important ‘analysis’ is the one that finds the system that best matches your true nature. If you are trading a system that is not a match with your true nature you are stressing your sympathetically aroused primal structures, mutating them to be LESS adaptive, resilient, ‘tough’ ...and your technique will inevitably gradually and suddenly erode.

The below is just an example

Someone manually trading a system that has some level of entry signal ‘ambivalence’ who is not suited to trading a system that has that level of entry signal ‘ambivalence’ will ultimately find a way to be a ‘dropout’ from the system. For an example from an otherwise perfectly fine method - most of the variable signal ambivalence in DBP’s SLTAMT is sourced in the individuals’ brains, not in the method itself.

Some students will simply encounter less signal ambivalence than others.

AND

Some students will be able to handle more signal ambivalence than others

Those who can’t handle a certain threshold of both will comprise a large percentage of the method’s ‘dropouts’ / failures

 

This means not making the typical beginner mistake of exploring/flirting with analysis / systems in isolation.

AND

This doesn’t mean means exploring your self in isolation.

It means exploring your self and systems in parallel... not easy...

Edited October 19, 2015 by zdo
it was fkt up

[jpennybags 11]

The amount you put at risk in a single trade needs to be insignificant to either or both you and the amount of funds you commit to trading.

 

A really bad day trading should only impact you emotionally; financially, you should not lose >1% of the total funds you commit to trading. Size each trade accordingly. As you approach 1% in loses, stop trading for the day,

 

I don't know that I've ever used the 1% rule (strictly)... except possibly when I was starting out (it's one of those things that kind of makes sense). Now... I tend to apply the "it's time to head to the house rule". I suppose it comes with experience, but there are some days that you just don't get it, and you are not going to get it. Best to head for the house...

 

Money management in it's most base form...

[jpennybags 11]

The most important ‘analysis’ is the one that finds the system that best matches your true nature. If you are trading a system that is not a match with your true nature you are stressing your sympathetically aroused primal structures, mutating them to be LESS adaptive, resilient, ‘tough’ ...and your technique will inevitably gradually and suddenly erode.

 

True words...

 

I've come to question as to whether or not I could (would) teach my methods to someone else... the answer is "no". It took me a long time to come up with what I do. It's an amalgam of getting my ass kicked, who I am, and continuously seeking out sound fundamentals. It is something of my own understanding, and I think that (in large part) is why it's successful (for me... in this time and place).

 

No one ever said this was easy (well, some have said it... I think they were not telling the entire truth).

[MightyMouse 12]

I don't know that I've ever used the 1% rule (strictly)... except possibly when I was starting out (it's one of those things that kind of makes sense). Now... I tend to apply the "it's time to head to the house rule". I suppose it comes with experience, but there are some days that you just don't get it, and you are not going to get it. Best to head for the house...

 

Money management in it's most base form...

 

It's a good rule to help you survive. I risk less than that now and I don't get in and out in a day unless something is really wrong with my "analysis".

 

It's same as heading for the house. If you get short a few times and there isn't anyone willing to sell lower than you did, then, well you had better go home.

 

I have no positions at this time. Seems like a lot of chop that I want to avoid in the frame that i am trading.

[jpennybags 11]

It's a good rule to help you survive. I risk less than that now and I don't get in and out in a day unless something is really wrong with my "analysis".

 

It's same as heading for the house. If you get short a few times and there isn't anyone willing to sell lower than you did, then, well you had better go home.

 

I have no positions at this time. Seems like a lot of chop that I want to avoid in the frame that i am trading.

 

To kind of make it back to the "kid" and the OP. It's not often successful to apply axioms to trading. As a for instance: you (mm) are sitting out right now because of the chop... as for me, I revel in the "chop"... I'm geared for chop, and I love it. The days that frustrate me are the days that the market grinds higher. It's a difference in temperament and style.

[zupcon 10]

I dont really like the term "money management", but if you mean adopting some sort of sensible risk management strategy to minimise risk of ruin, and that can be any position sizing method you like really, IMHO money management is pretty much irrelevant

 

I used to buy into the argument that you optimised MM based on your strategy. It makes some sense, a strategy with a 80% strike rate, and a strategy with a 20% strike rate are going to require a different approach to position sizing, but any kind of specific detail below that is completely irrelevant.

 

The didtribution in trading returns is pretty much random for most people, and the optimum MM approach during period X is going to differ from the optimum approach in period Y. This inherant randomness in returns kind of makes any MM optimisation pretty much redundant

 

Its also probably worth pointing out that psychology can often play a part, and you may not actually be able to trade your optimum MM strategy. How many people could trade a sizable account using something like optimal F for example, would you really tolerate a 98% drawdown on an 8 figure account even if its exactly the right thing to do ?

[MightyMouse 12]

I dont really like the term "money management", but if you mean adopting some sort of sensible risk management strategy to minimise risk of ruin, and that can be any position sizing method you like really, IMHO money management is pretty much irrelevant

 

I used to buy into the argument that you optimised MM based on your strategy. It makes some sense, a strategy with a 80% strike rate, and a strategy with a 20% strike rate are going to require a different approach to position sizing, but any kind of specific detail below that is completely irrelevant.

 

The didtribution in trading returns is pretty much random for most people, and the optimum MM approach during period X is going to differ from the optimum approach in period Y. This inherant randomness in returns kind of makes any MM optimisation pretty much redundant

 

Its also probably worth pointing out that psychology can often play a part, and you may not actually be able to trade your optimum MM strategy. How many people could trade a sizable account using something like optimal F for example, would you really tolerate a 98% drawdown on an 8 figure account even if its exactly the right thing to do ?

 

There is no rational way to recover from a 98% drawdown. Personally, I would have to ignore some rules I have in place and I would have to experience about 100 years of consistent losses to achieve a 98% drawdown. I am 1/2 way to 100 now. I would assume at some point my surviving family members would get power of attorney on my account well before I turned 150 years old.

 

Anyone who would embark upon a strategy that could experience a 98% drawdown is trying to use the market to solve his problems. Usually that individual ends up solving the markets problem; it's thirst for liquidity.

 

So the answer is I would not get involved in the first place (98% drawdown).

[zdo 20]

What do you mean by this? All other things being equal, a larger position size means more risk doesn't it?

 

To me it seems that position sizing is how we control risk. Often people seem to confuse stop losses with 'managing risk', but that's nonsense - a trader might not use stop losses at all and yet still control risk.

 

Emily,

 

Isn’t using position size to “control risk” in effect just a convoluted ‘dollar stop’ ?

 

zero lag reply time

 

zdo

[zdo 20]

Noobs,

The status quo / the ‘voice of trading’ sugar coats it. They would have you apply very general rules to MM (see http://www.traderslaboratory.com/forums/money-management/19267-90-analysis-10-money-managment-2.html#post200085 for example)... and mix the "logic" of sizing and ‘stays’, etc etc. An alternative way to look at it is -

‘Stays’ (where to exit / “stop out” in adversity plus where to exit with profits) are best based on individual system stats.

Sizing is best done with portfolio (of systems) level stats.

Ie ‘stays’ levels are best derived from a different set of calculations from the calculations of optimal ‘sizing’ ------- and yes, that’s even if your portfolio of systems is only one system!

 

... and fwiw, imo your portfolio of systems should never be just one system

Edited October 27, 2015 by zdo

[zupcon 10]

Noobs,

The status quo / the ‘voice of trading’ sugar coats it. They would have you apply very general rules to MM (see http://www.traderslaboratory.com/forums/money-management/19267-90-analysis-10-money-managment-2.html#post200085 for example)... and mix the "logic" of sizing and ‘stays’, etc etc. An alternative way to look at it is -

‘Stays’ (where to exit / “stop out” in adversity plus where to exit with profits) are best based on individual system stats.

Sizing is best done with portfolio (of systems) level stats.

Ie ‘stays’ levels are best derived from a different set of calculations from the calculations of optimal ‘sizing’ ------- and yes, that’s even if your portfolio of systems is only one system!

 

... and fwiw, imo your portfolio of systems should never be just one system

 

I'm totally in agreement about the distinctions that you make between portfolio and system based stats. Its a very good point, and its very good advice.

 

The points that I was trying, and probably failing to make were as follows:

 

Any "statistic" derived from a trading strategy needs to be more along the lines of rough estimates, rather than high precision statistics. I'm sure there are people out there using insanely complcated statistical approaches, but thats probably beyond the realm of most retail traders.

 

I'd also probably argie that the units used to derive any statistics are probably best based on some sort of market based values rather than points, or dollar amounts.

 

The main point that I was trying to make is that if you take a simple analysis tool like Software for Position Sizing Optimization : Forex Trading Systems : Stock Trading Online : Adaptrade Software and you attempt to optimize any MM strategy its simply a matter of fact that different strategies are going to perform differently at different times and in different market conditions. Over a diversified portfolio of systems, and enough time, things tend to average out, so you might as well go for an MM strategy thats easy to understand an impliment, and that you can actually trade (my example of optimal f hopefully illustrates the point that the optimum strategy isnt necessarily the best strategy)

 

The problem of course is that you dont know, what you dont know, and I am prepared to accept that there are systematic traders out their who's level of sophistication in the implimentation of their MM is way beyond mine, and that they are possibly able to dynamically optimise their MM approach based on market conditions, and that such an approach might potentially form a part of their edge.

 

I'm a system trader these days, and I tend to associate with other system trades who share similar views to my own, which is possibly shortsighted, but it cuts out a lot of extraneous noise. However I started out staring at a screen, and there are times when you are definately in tune and on a roll, and you know it. I never reached the point where I had quite enough confidence to push the gas a little harder during these periods, but I suspect that if I'd continued along that route, eventually I almost certainly would have done, and I know guys who regularly do that based on nothing more than intuition

 

However, on the other hand, in my limited experience, organisations who employ multiple traders tend to handle the risk aspects on a far higher level of abstraction than that that of an individual trader or individual strategy, and I suspect that they've almost certainly done a lot more work that I have on this stuff, so if they cant do it, who can.

 

the concepts of minimising the risk of ruin for a single system isnt rocket science, nor is the idea of diversifying risk across a portfolio of systems. What is rocket science, is the implimentation of those methods. I however would argue that the inherent randomness in returns pretty much invalidates all assumptions on which even the most complex of those models are built. Take 1000 guys trading a simple % fixed fraction, and a thousand quants implimenting the most complex of MM strategies, and after 30 years, I suspect the distribution in final PnL from the two populations wont be too disimilar

 

I'm not attempting to sugar coat anything, I'm saying there is no MM silver bullet, you have to take the rough with the smooth. Im not advocating that people shouldnt reseach these issues, I still spend a fair proportion of time looking at MM, despite previous reseach being completely fruitless, and I suspect that I'll continue to do so

 

I even make the point that you'll need a different approaches based on system metrics, but getting bogged down in unnecessary optimisation is in my experience not the best use of time

[zdo 20]

off topic re 'report':

Well - that “2” was fun... and right back where we started - as usual...

 

 

 

 

back on topic...

 

zupcon, make the “final PnL from the two populations” very “dissimilar”

 

... that they are possibly able to dynamically optimise their MM approach based on market conditions, and that such an approach might potentially form a part of their edge.

That is IT! Precisely.

Long ago I was lucky enough to realize that I needed to take a bassakwards philosophy / approach and MarketType (tmz) the auction first prior to any “analysis” and use that framework as a basis to fluctuate relative weights for each system across a portfolio of 12 (most of them very simple) automated systems ... with the intent of sizing each trade to the ‘odds’ of the opportunity.

Even if the exposure to many of the opportunities is relatively small, the ultimate functional purpose is to not miss ANY opportunities... which would be an operational impossibility for me to accomplish manually...

 

Now turning to ‘risk’ (... and I’m assuming we’re focusing here on the ‘trade itself’ type of risk across a series of trades)

re

different strategies are going to perform differently at different times and in different market conditions.

and

the optimum MM approach during period X is going to differ from the optimum approach in period Y. This inherant randomness in returns kind of makes any MM optimisation pretty much redundant

zup, while I hear what you’re saying about the ‘limits’ of MM and I understand why you’re saying it, from my experience, I can categorically recommend traders not be discouraged by the realities of “inherant randomness”. Rather, they should meticulously find and tune a system's ranges of “ the optimum MM approach during period X [which] is going to differ from the optimum approach in period Y” (brackets mine) and stay within them...

It would be better for a trader to even randomize his or her ‘MM’ decisions within those ranges than utilize vastly simplified ‘stay’ decisions or - worst - base them on ‘psychological ease’

 

 

 

kwikblurb1...

Again...

Base Sizing on opportunity ... algorithmically derive sizing from portfolio (of systems) level stats.

Base ‘Stay’ (or not - in profit or in loss) on ‘risks’ ... algorithmically derive them from individual system probabilities.

 

Kwikblurb2...

re“inherant randomness”

Fwiw, It is only randomlike - not really “randomness”. Big difference in the long run.

 

 

Kwikblurb3...

for sizing, Optimal f, etc is a starting point - nowhere near the finishing point

 

blurb4

re “I'd also probably argie that the units used to derive any statistics are probably best based on some sort of market based values rather than points, or dollar amounts.”

NONE of my systems have ever ‘optimized’ stays to dollar targets or to dollar stops. Almost all my systems ‘stay’ decisions are founded on ‘price action’ patterns... with some of them throwing in some ‘order flow’ stuff, some of them throwing in some ‘indicators’ work (WOT?!) (btw, nothing ‘off the shelf’ used... ), some of them throwing in some ‘scaling out’ work... etc etc.

 

Kwikblurb5...

The higher the hit rate for a system, the more closely ‘stays’ (ie stops and profit taking) must be finely calibrated. etc etc

 

blurb6

(Very very Generally) --- Re the Drawdowns allowed issue.

True trend systems can be allowed a 60% drawdown before shutdown.

Quasi - trend following systems can be allowed ~ 40% drawdown before shutdown.

Momentum/coattail systems (and the 'equally' successful strat of fading the system's signals :rofl:) can be allowed ~ 30% drawdown before shutdown.

Regardless of ‘testing’ results, just about all other systems should never be allowed to run past 20% drawdown before shutdown ... :haha: considering most of them are losers to begin with etc...

 

 

 

 

 

 

 

“And then the day came when the risk it took to remain tight in a bud was more painful than the risk it took to blossom.” Anais Nin

[zdo 20]

"If something is worth doing, it's worth doing badly." Leslie Buckland

 

Most system developers first turn to ‘ volatility’ as primary driver of ‘condition specific’ sizing... and get stuck there...

(btw, my advice = in sizing work, skip 'volatility’ completely ...you'll naturally be brought back to when and how to include it properly later ) ... and ...

 

Most of these developers turning to volatility as primary driver of ‘condition specific’ sizing get sucked into using measures of range (ATR, etc.) as a measure of volatility. A better (however more complicated) measure utilizes studies of passage through price brackets/zones ... number brackets traversed, time duration in each, etc...and ... btw

 

Most developers never realize the high reliability of cyclicity in properly measured ‘volatility’

 

A $million+ ©TA offers this: Improving Trading System Performance Using a Meta-Strategy

 

A $billion+ CTA offers this: "I have a staff of PhD's researching volatility based position sizing. They haven't come up with anything."

 

" You cannot teach a man anything; you can only help him find himself." Galileo

[sergso 10]

70-30, trade small and more frequently, big bets will get you at the end.

[zdo 20]

70-30, trade small and more frequently, big bets will get you at the end.

 

sergso,

"70-30, trade small and more frequently,... “ may be perfect advice for anyone trading the exact same system as you, on the same instruments, and with the same capitalization... etc

 

“70-30” may be correct --- but only for you, your financial state, and your system. There is no way you or anyone else can pigeon hole everyone else into that ratio. The usefulness of that advice is not ubiquitous even to someone trading a single method on a single instrument with single contract size... And past a certain system specific threshold of capitalization, the practicality of such advice goes completely microscopic. Keep going ... and past a certain threshold in the diversity / complexity of one’s portfolio, regardless of the ‘analysis’ methods used, flipping this 'advice' to “30-70” will not be nearly enough to manage dynamic sizing and allocations... especially with leveraging or in opm cases...etc etc. ... and ... At this point I won’t even go into the variability in the depth / time / etc. of ‘analysis’ between traders - besides to say it’s another reason pushing out a generalization about the correct or dominant ratio of analsis and money manglement is pitiful.

 

“trade small and more frequently” If limiting size and goosing frequency improved the performance of your trading that’s really great - but, come on man! - You can’t deal out advice like that as if it applies to all systems. It is a disservice to your peers ... at the very least a waste of their time. Traders need to trade as closely as possible the optimal size for their system(s). And a trader needs to trade at the exact frequency a system calls for without inserting trades (ie “more frequently”) or omitting trades (ie “I missed that trade” or “I didn’t take that trade”)... randomly / arbitrarily goosing or limiting frequency and / or size is just another loop ride on the loop around Looserville.

 

“big bets will get you at the end”. You may be shooting for some brevity with this one... so I’ll almost give you a pass -. Almost  ... still , let’s look at a couple of the words you used and some possible ‘presuppositions’

Re: the word “bets” - at a some point in each type of betting game, the “window closes” and from that point forward the results to your equity are completely out of your hands. In the trading game up until the time your broker liquidates your position(s), the ‘window’ stays open...with trades you still have possibility to influence the results to your equity.

 

And re: “big” The crucial variable here is not “big” or “small” (/ size). The crucial variable is positive expectancy.

so more accurately - and hopefully just as succinctly

If you have a positive expectation, the only thing that will get you is holding losses until they are “big”

 

I can’t think of a field where ‘general guidelines’ are less applicable than in trading - yet the ‘voice of trading’ continues to deliver ‘truths’ that are actually only true in ~1% of instances ...by the tens of thousands....media, forums, books, articles, seminars, etc etc...

 

sergso, almost all the good posters are gone now... it’s up to us average posters to do a better job...

[engulf 10]

I'd say 90% mental(emotions), 10% technical when live, 90% technical 10% emotional when in sim.

[zupcon 10]

 

Most system developers first turn to ‘ volatility’ as primary driver of ‘condition specific’ sizing... and get stuck there...

 

And ironically, many traders employing this approach end up taking their largest positions (and losses) at times of low volatility, and thats generally the time that the types of systems typically traded by the retail crowd tend not to do particularly well

 

Still trading "educators" will continue to peddle this crap, and people lap it up. You cant blame them really (the vendors that is) :rofl:

[aimhi 10]

If 90% is for analysis and 10% for money management, then what ratio can be allocated to emotions..?