Fixed Ratio money management PDF- One trader lost ($3000) during the course of a year trading one contract of system A. Another trader makes $25,000 trading the same system that year. One trader makes $24,000 trading system B one year while another makes from that same system $79,000, both with the same starting capital. What is the difference between these traders?
Money management is often viewed as a dull, sophisticated idea best left to professionals. But this couldn’t be further from the truth. Money management is an exciting concept that all serious traders need to understand. In fact, money management alone can be the difference between modest returns, and phenomenal gains.
In this article, we’ll review what money management really is, discuss different strategies for money management that can be used right away, and introduce one of the most powerful money management methods for maximizing returns for leveraged traders.
What is Money Management?
In the simplest terms, money management is a strategy for increasing and decreasing your position size, in order to manage risk while obtaining the greatest growth possible for your trading account. There are many ideas associated with the term money management. Before going any further, it’s important to understand the difference between some key money management concepts.
Risk Management – The amount of risk or predefined acceptable loss allocated to a trade.
Example = A trader with a $100,000 account that wants to use conservative risk management, might risk 1% of the total account ($1,000) on any given trade.
Position Size – The number of shares or contracts traded in a single position. Example = A trader that wants to use a stop loss of $10 and keep risk at $1000 will trade a position size of 100 shares ($1000/$10 = 100 shares).
Many traders will use the terms risk management, position size and money management interchangeably. However, it’s easier to understand money management if you look at these concepts independently. Once you are familiar with different money management concepts, you’ll see that risk management and position size are tools for implementing a money management strategy.
Types of Money Management
All money management strategies can be broken down into two fundamental methods: martingale and anti-martingale. Martingale money management strategies are based on increasing the risk and position size after losses, while anti-martingale methods will only increase risk and position sizes with profits. The goal with a martingale approach is to make up for losses by risking more money. The challenge with the martingale method is that there can be unrecoverable catastrophic losses, and it’s almost impossible psychologically to apply this approach to a trading account over time. For these reasons traders should always consider anti-martingale methods.
1) Money management is more powerful than any trading system that it can be implemented to.
2) Money management is more stable than ANY trading system. It is based on math, and math does not change.
3) It is more logical to implement proper money management to a trading system than to trade that system without it. Money management will take you farther with less.
4) The wrong money management applied to your trading could actually hurt the end result.
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Free Download link: At the end of the post
Language: English
Excerpt
RISKING 2% ON EACH TRADE
It amazes me how many vendors in the industry push this money management method. This may be good for managed funds with millions of dollars, but it is totally impractical for individual traders with average accounts. I need only make one illustration to prove my point. If you have a $20,000 account, you cannot trade unless the risk on each trade is at or less than $400. If you have a $50,000 account, you cannot take a trade with a risk of more than $1,000. Further, if your maximum risk is only $1,000 with a $50,000 account, you cannot increase contracts until the account increases to $100,000! You cannot increase to 3 contracts until the account reaches $150,000.
You might be saying to yourself about now that this is simply a more conservative method of money management and that someone may not want to risk more than this. Don’t entertain that thought because it is totally and completely 100% false. I hear all the time how traders want to say money management is simply a matter of preference and that it is going to be different for every trader. To some degree, this is true. But if you take the same account size with the same risk tolerance and the same profit goals, there is only one “best” money management application for that set of circumstances. In geometry, the definition of a line is the shortest distance between two points.
There are other ways to get from point A to point B, but there is only one way that is most efficient to achieve the same results. That is the same way with money management. It is only a matter of preference is one trader doesn’t want to reach point B in the most efficient manner. If that is the case, you should probably hang up your trading shoes. There is a “best” way and it is not a matter of preference. It is a matter of mathematics. Keep that in mind as we continue on.