Forex And Commodity Trading ~Money Management
Your account was up over 200%, you were feeling great about your
positions. However over the last three days you can t believe how the market
turned on you. You are shell-shocked over what happened you have not
only lost all your profits but your account is down 70% !!! You are shaken
but you think you can quickly make it back. After all you were just up
huge!! You keep focusing on that 200% gain you had before those bastards
ran you down!! You still have $10,000 left in you account. What advice
should you give yourself?
Your advice to yourself should be to get out of the market Immediately!
You don’t have the proper mind set and have lost to much at this point to
to trade speculatively. This is one aspect of the psychology of Money Management.
You need to know when to stop and realize how much your account
has to recover from various draw-downs. I want you to study the ratios
below and print it out. So you can see at what point you need to stop
and regroup. I my opinion you must stop at a maximum of a 23% draw-down.
Draw-downs Gain to Recovery
5 Percent; 5.3% Gain
10 Percent Draw-down; 11.1% Gain
15 Percent Draw-down; 17.6% Gain
20 Percent Draw-down; 25% gain
25 percent Draw-down; 33% gain
30 Percent Draw-down;42.9% Gain
40 Percent Draw-down; 66.7% Gain
50 Percent Draw-down; 100% Gain
60 Percent Draw-down;150% Gain
75 Percent Draw-down;300% Gain
90 Percent Draw-down; 900% Gain
Recovery after Draw downs
Notice how much your account has to recover from various sized draw downs
in order to get back to even. For example, losses as large as 20%
don’t require that much of a corresponding gain to get back to even. But a
40% draw down requires a 66.7% gain to break-even and a 50% draw down
requires a 100% gain.
Losses beyond 50% require huge, improbable gains
in order to get back to even. As a result, when you risk too much and lose,
your chances of a full recovery are very slim. Keep in Mind we are not in
the stay or get back to even trading game. By, keeping our losses under
control and small we don t have to play the “I need to get back to even”
game.
What is Money Management?
I my opinion, money management is the most significant part of any
trading system. Many professionals, and most amateurs, do not understand
how important it is.
Since money management is the difference between poor performance and
great performance – the difference between going broke and being a successful
professional – it’s important that It has a specific definition. For me
the definition I was taught it is:
Money management is the part of your system that tell
you “How Much” you can afford to put on at a given
price in the market. It is linked to “How Much” risk is
involved in the Trade. You an only trade an amount that
if you are wrong it will not damage the account beyond
repair. You also have to trade an amount that is meaningful
if you are correct and your profit targets are reached.
Its a balance between a small draw down and a sizable
gain.
There are many ways to implement money management listed below are the main criteria that I feel are necessary to be successful.
Position Sizing What percentage should I risk?
Do I understand the Risk of Ruin matrix
What are my Trade objectives?
Who am I as a trader?
What is Average True Range Trading for longer term trades.
Entry Efficiency
Exit Efficiency Index
Exit Efficiency Gauge Formula
Do I have a Creative Money management system?
Core Equity
Vs.
Base equity
Psychology of it all; Does It fit with my personality.
A bit of selfish promotion If you are interested in this all important topic please see
Money Management.
