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Money Management Question

Discussion in 'General Forex Talk' started by rkinman, Apr 25, 2009.

  1. rkinman

    rkinman Recruit

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    The great wonderful question about money management. I was hoping to get some expert advise here for the fact I still get confused. I am going to implement a trend following strategy that runs on 8 currency pairs. H4 and Daily charts.

    Here is the main MM strategy I will be using so have an idea of whats going on.

    Hoping to start a low account ballance of $2000.00. I want to only use %2 of my core equity per trade. Now the first trade being placed, that would be $40.00 in the trade using an stop loss based on the far end of the real price moving average. That is more of a safety stop because the strategy indicates exit signals way before. I will be calculating my lots with the daily range as the stop loss. This is not the hard saftey stop, only for calculations. Currently with the EUR/USD daily range being around 151 and the pip value being $1.00 per micro lot I am looking at 0.02 standard lots for the trade. If the math was done right.

    I figured with such a small account I will need a micro account.

    My problem is leverage. It always confuses me what kind of leverage to get with a account. Especially with running Trades in the H4 and daily patterns. I know the lower the leverage the more conservative it is. I want decent profits, but nothing that will increase my risk and make money management go out the window with an account so small.

    What leverage would be sufficient?20:1, 50:1?
     
  2. Go easy on Margin

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    if you are basing your position size on your account value why does the amount of leverage matter?
     
  3. rkinman

    rkinman Recruit

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    Wouldn't it interfere with margin. I still would like to be able to place a trade when I have a position in draw down.
     
  4. Go easy on Margin

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    It depends how you structure the position and where you leave your s/l. You should be able to figure out how your provider will margin you but risking 2% of the account should still leave a large margin to open new positions even if the first is in drawdown.
     
  5. Go easy on Margin

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    out of curiosity, how much do you expect to make annually on the $2k account?
     
  6. rkinman

    rkinman Recruit

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    Enough to make me happy. I have been demoing my system for some time and getting 700+ pips end of month on my worst month. If I can establish a good track record, who knows what the future could bring. But still beeing new to forex, I would rather risk 2k than a 20k account. Its a good way for me to practice with a live account. For me to risk 20k for example would be a fortune for me. I like forex for the thrill that it gives me. If I can make a couple bucks on the way, why not. But playing on a demo account with with a make believe dollar amount is completly diffrent. When I go live, I want to get it right the first time. Especially trading the big time frames where SL's of 200 pips are nothing. Thats why I trade 8 currency pairs when the signals present themselves. I just have to be in the game when the time comes for that big move in the pair.

     
  7. Go easy on Margin

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    ok, good luck.
     
  8. ChrisEccles

    ChrisEccles Private, 1st Class

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    Remember that, in terms of money management discipline, margin is a
    dynamic quantity.
    -
    Let's say you have an open position which is acting well, and you've
    shifted the S/L to knock you out at minimum 50 pips profit. That trade
    is a solid guarantee of increased margin, so you can place your next trade
    based on your 2% rule (or whatever), taking the 50 pips into consideration.
    With four or five open positions, the math gets a bit hairy when you're
    trying to do it in your head on the fly, but it's good mental gymnastics.
    -
    What your broker's "floating equity" figure on your trading platform can
    never tell you is the aggregate worth of your currently safe, "free ride",
    trades, and this is where you need to pull in some nifty arithmetic to get
    the most out of your money management strategy. It can often make the
    difference between placing, say, 3 lots instead of 2 on a good setup and
    still staying within your MM discipline.
    -
    Just my 2¢ worth.

    -
    Chris
     
  9. Pharaoh

    Pharaoh Colonel

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    Or, avoid the hairy math. Figure your risk based on what percentage of your account will lose if the trade stops out. If you decide you can risk 2% per trade, then also decide the maximum percent of your account you will have at risk at any one time. If you were to select something like 10%, then you shouldn't have any real worries about leverage with most brokers.
     
  10. Go easy on Margin

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    One more thought

    I totally agree with the 2 previous posters. Here's one more thing I did which I found helpful. If you have excel and know a little VBA it's not to hard to create a simulation using random numbers where you run an account over time with your risk parameters. To make it simple make an assumption about how often your are right, say 55% of the time, what your risk reward is, like winning 1.1 more times than you lose, and just do one trade a day over a series of years. Then vary the size of your risk as a percent of your account value, again making a simple assumption of doing one trade a day and being in or out at the end of the day. Do it over a long time. What I found is that leverage kills you if you risk too much, you are subject to losing streaks and if you use too much you'll be buried with too large a risk on your account. I got a graph like this
    This is simply based on coin flips on excels (not very good) random number generator, it does not account for portfolio affects, and I'm sure is not the ultimate solution but it gives you a good idea of the casinos edge in this game. It's not the odds, it's that you are subject to bad luck magnified. So if you want to make a living have enough capital to start, spend it well, and if you do you're homework you'll beat the house.
     

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