Money Management: The Pillar Without Which You Can't Succeed
Elena Kaminskaya, Head of the Analytical Department at HY Makets.
"One-third of success in trading depends on trading systems, one-third on money management, and one-third on the trader's ability to strictly follow the rules he has worked out."The best words that have ever briefly and succinctly described the principles of successful trading. The quote from the book by American trader Bruce Babcock is becoming more and more popular precisely because every market participant understands in his gut that it is so.
How to choose a money management system?
Having chosen a reliable and convenient for themselves trading system, the trader needs to analyze, choose and build up own management strategy. Why on your own? Analyzing the question "What and when to trade?" everyone comes to some results, as a result of which the unacceptable risky and unprofitable at the moment instruments are discarded. As a result, there are always 2 variants: one giving a little profit but stable, and the other risky but giving a chance to make a great deal. Which option is more correct?
The fact is that there is no right answer. Every investor, according to his nature, character and willingness to take risks, must answer this question himself, and then act accordingly.
However, no matter what answer you gave yourself to this question, without examining money management can't do without it.
If market dynamics were random, all market participants would be on an equal footing and there would be no professional players who have success, money and recognition. Growth and development, successes and mistakes (that is, experience), are integral components of becoming a professional. Money Management involves understanding how and when to use different techniques and approaches based on their inherent risks, theoretical aspects, and analysis of your own trading results.
In this series of articles we will look at the basic types of capital managementTheir differences, advantages and disadvantages, as well as the practice of their application and results.
Variants of money management systems
Recently, traders are considering the following types of money management:
Lack of capital management.
2. Multiple Contracts.
3. A fixed amount at risk.
4. A fixed percentage of capital.
5. Coordinating winnings and losses in trading.
6. Intersection of price curves.
7. Application of optimal f.
In order to correctly choose the most suitable method of capital management, you must first of all decide what level of risk and profit is acceptable for the trader. An important component is also the choice of "game prices"That is, the amount that you can manage without subjecting yourself to excessive psychological distress, because the latter is usually fraught with negative consequences.
Do not bet large sums at once, because in case of failure you will lose them before you even have time to learn how to use this method correctly. Let's be honest. If you lost, it means that you did not take something into account. Do not risk large sums until the ratio of losses to the total number of transactions is reduced.
You should always knowwhat is currently going on in the market. You have to know the facts. You also need to know all the rumors in order to be aware of the possibility of the most incredible events, but even more importantly, you need to know what rumors the market has already reacted to. After all, in that case, either a sharp rollback pair, or a logical continuation of the trend on the part of those who were waiting for confirmation by facts.
The method of no capital management is to enter the market with one position every time the system gives a signal to enter.
Multiple Contracts Method similar to the previous one, but with traders opening several positions
The fixed amount at risk method is a pre-selected level of risk, which the trader is ready to take before opening a position.
With a fixed percentage of capital traders decide what percentage of the total account value he will risk on each signal to trade.
The method of matching wins and lossesor pyramid building method, is to determine the optimal trading volumes after a certain number of successful or unsuccessful trades.
The method of crossing the price curves consists of determining the long and short moving averages of profits and losses, on the position of which the trader is based to open positions.
Optimal f Ralph Vince - value of "fixed %", at which, within the framework of the current trading "scenario" it is possible to obtain the maximum final profit. But to apply this method we need good preliminary statistics
What this series of articles on money management is about
These and other methods, their advantages and disadvantages will be considered more specifically later. Further we will consider application of the classical theory of econometrics in trading for competent and effective risk management. The question of using technical indicators is still urgent. It is also important to consider the problem of the emotional component in trading, study the reasons and consequences of the factors influencing on the trader's actions. Knowing all the pitfalls, what to expect from ourselves and how to cope with it, we will unconditionally achieve success. The final part will be a review of the myths of money management.
Capital management skills - the linchpin without which success is impossible. Without competent money management it is impossible to receive profit stably and for a long time, and complete ignorance leads to a rapid loss of the trading account and considerable losses. Money management rules should be studied in the first place, because it is the key to success, thanks to which you will save and increase your capital.