Money management systems in trading
As has been the case for many years, the main problem with trade decision making is the accuracy of forecasting market price movements. The development of methods for predicting price movements is as eternal as the search for the meaning of life. However, in building decision-making models, too little attention is often given to capital management. No, of course, everyone thinks about it, but frankly, there are very few trading systems in which you can find a dynamic system of capital management and stop order placement.
The purpose of this article is to show how a simple risk management system can be used as a basis for a trading system, while the price movement forecast is based on the simplest methods and is not the basis of a strategy, as it happens in the vast majority of cases.
Simple money management system in trading
The methodology is based on setting rigid large targets for profit taking with gradual strengthening of the position. The work is carried out on instruments with a high level of correlation of profitability. The strategy is designed for medium and long term prospects.
The basic principle of trading is as follows: after identifying two instruments with a high level of correlations yields, one of them is traded only long (buying), and the other only short (selling). At the same time, aggressive strengthening of the initial position is performed. For each addition, different stop orders are placed, and the closing of the total position is made at the initially defined level. It is desirable to make the first entry into the market on signs of breaking the current trend and try not to work in continuation of the existing trend. In this case, positions are opened on the second instrument only in the opposite direction to the first one.
If there is a situation when a buy and sell position is simultaneously opened for the first and the second instruments at the same time, this option can be considered as a hedging. From such a hedging It is always possible to exit with minimal losses, as both positions are treated as independent. In most cases, similar to a hedge lock is opened when the manager does not want to fix the loss, leaving two floating trades.
From the point of view of trading psychology, when using this method, the trader does not fidget, choosing the right direction of price movement on the instrument. In any case, his choice will be correct, because if the first instrument did not meet expectations, there is a high probability of a positive outcome when working on the second one.
Regarding the definition of FOREX instruments, the choice may fall on AUD/USD and NZD/USD - these two pairs have both a high correlationas well as similar volatility prices. When using shares of Russian companies, the choice may fall on a pair of oil "blue chips" LUKOIL and Rosneft. Of course, the dynamics of movement of these pairs of shares and currencies may differ, but in the long term, if the general attitude of investors to these instruments remains at the same level and their own risks regarding their pair remain unchanged, the effect of the difference in dynamics is not decisive.
The movement target should be significantly larger than the original stop lossHowever, there are situations when setting very high and distant goals justifies itself. However, there have been situations when setting very high and distant goals justifies itself. The principle "He who wants a lot achieves a lot" works here. Get away from the standard rule of mani-management 1:3. If you follow the execution of small stops, it is quite realistic to maintain 1:20.
It is recommended to determine price movement targets based on the current market volatility. Among the quite accurate methods of determining profit taking levels, we can mention the common techniques of the previous ones local highs and lowsas well as by psychological levels.
As has already been said, such the strategy is designed for the long term. As practice shows, long-term position holding is neglected by most traders, wishing to get quick money. However, intraday trading is a strenuous activity. When working on big trends, there is always time to calm down and reevaluate the situation, there is no such tension and sometimes hysterical actions. Moreover, the problem of requotes will become insignificant for you.
The capital management methodology presented for your judgment does not claim to be absolutely infallible, but, as the same notorious practice shows, it has the right to exist. In this article, the method is presented only formally.