Basic rules of money management on - Money Management

If you intend to work in the financial markets, you must be aware of the fact that, first of all, you must develop an effective program of capital allocation. Systematic money management when working in the markets with margin trading guarantees the trader a safe existence. It is necessary to strictly observe the equal ratio between the amount of profit and the amount of loss in the average transaction. In this case, the trader does not play, but works with his investments. Considering money managementLet's take a look at what the main points of this process are.

The basic tenets of Money Management

- Mandatory reserverequired in non-standard situations, is not less than half of the invested capital. This is the first rule for determining margin for open positions. This is Murphy's advice. However, many analysts recommend an even lower percentage of invested capital for safe operation - from 5% to 30%.

- Avoiding ruin helps the trader to use the following principle: you should not invest in one market more than 10%-15% of all used funds and invest solid capital in an individual transaction. Murphy recommends that the risk rate for each market should not exceed 5% of the amount invested. In this case, in case of a losing trade a trader loses an insignificant part of invested funds. Elder gives an even smaller figure: from 1.5% to 2%.

- Every trader strives for profit; it is a natural desire when working in the market. However, in this desire do not forget about possible losses. If you place capital in a market of the same group, the total guarantee amount should not exceed 20%- 25%, because the markets of the same group move relatively equally. It should not be forgotten that optimal placement of funds should be applied, to some extent they should be Diversified. In this case, the losses from one major transaction can be covered by the profits from the other.

- Determining the degree of diversification portfolio. One of the ways to protect invested capital is to diversification. But in this case, too, a sense of proportion is necessary. How do you determine the degree of diversification of a portfolio when managing capital? A healthy balance between concentration and diversification must be maintained at all times. If positions are opened simultaneously in no more than four or six markets of different groups, it is possible to achieve relatively reliable distribution of funds. It is important to understand that diversification of invested funds is the higher the higher the value of negative correlation that exists between the markets.

- Determination of the level of stop-loss orders. For the time the trader is absent from his workplace there are placed stop orders. This is done in order to save the trader from ruin (execution of stop losses), or in order to provide additional profits (stop profit).

Stop Loss SizeThe amount of losses depends, first of all, on how much the trader is ready to lose on one transaction and, secondly, on the correctness of his analysis of the market situation. For example, a trader has a dollar deposit of size S. Upon opening of the position he has a loss of L per cent of the deposit amount. Suppose a contract of 100,000 is opened by buying USD against selling CHF, the opening price is p1.

Buy USD 100,000;
Sell CHF p1 x 100,000.

At what mark p2 should the player put sell orderso as not to exceed the permissible level of loss SxL?

If an order at p2 had triggered - the loss from this position would have been:

Loss=-CHF (p1-p2)x100,000.

Again, the loss should not be more than USD SxL, or CHF SxLxp2. Consequently, we have:

(p1-p2)x100,000=SxLxp2,

from here we derive the following expression for determining the order level:

p2=p1-p1 xSxL/(SxL+100,000).

In determining the level of stop order The trader should proceed from a reasonable combination of technical factors reflected on the price chart and considerations for the protection of his own funds. The more volatile the market is, the more distant the levels should be stop loss orders from the current price level. To keep losses from unsuccessful trades to a minimum, the trader should place stop orders as close to the price level as possible. In case of short-term price fluctuations ("disturbances") too "hard" stop-orders can lead to unwanted position liquidation. Too distant stop orders are not as sensitive to "interference," however, can lead to significant losses.

- Determination of the ratio of possible profits and losses. If the market moves in an undesirable direction, the profit margin, which is determined for each potential trade, must then be balanced against the potential losses. Usually this ratio is set as 3 to 1. Otherwise, it is necessary to refuse from market entry. For example, if a trader lays down the risk of a deal as $100, then the expected profit should be $300.

Implementing money managementIt is necessary to strive to maximize profits by keeping profitable positions as long as possible in the case when a relatively small number of transactions during the year can bring significant profits. At the same time, losses from unsuccessful trades should be minimized.

— Trading with multiple positions. If a trader enters the market with several contracts, concluding a contract for more than one lot, he should divide them into so-called trend and trade positions. In this case trend positions are conducted with fairly liberal stop orderswhich allows you to maintain these positions even in conditions of consolidation and price adjustments. Such tactics allow the trader to extract the maximum profit from the transaction.

Trading positions are restricted by fairly rigid stop orders and are intended mainly for short-term trading. In this case, when the trend resumes, they are restored, and when certain price points are reached, they are closed.

- Conservative and aggressive approaches to trading. The conservative approach is favored by many analysts. For example, Tevels, Harlow, and Stone, in their book "Playing in Commodity Markets futures» пишут:

«…трейдер, который имеет худшие возможности для получения прибыли, но при этом придерживается консервативного стиля, на самом деле, с большей вероятностью добьется длительного успеха, чем трейдер, который располагает большими возможностями для получения прибыли, но при этом играет агрессивно».

This is also the opinion of Murphy:

«…консервативные трейдеры в конечном итоге побеждают. Агрессивно играет тот трейдер, который желает быстро разбогатеть. Его доходы весьма значительны — но только до тех пор, пока рынок движется в направлении, благоприятном для него. Когда положение дел изменяется, агрессивная стратегия, как правило, приводит к провалу».

Rules for opening positions:

1. open only if there is one main and at least one additional signal;

2. прежде чем открываться, необходимо заранее сформулировать и записать на бумаге: цену входа в рынок; цену, по которой закрываем прибыльную позицию; цену, по которой закрываем убыточную позицию; расчетное время «жизни» открытой позиции.

3. open against trend carefully and for a short time;

4. open on time Flat carefully and for a short time.

Rules for maintaining positions and partial closing before the settlement time:

1. only if the analysis confirms the earlier conclusions, support the positions;

2. close partially: when losses exceed the calculated values; when the price has reached the point calculated to make a profit;

3. wait: if the amount of losses is lower than estimated; when the price remains at the same level; if the price has not yet reached the estimated point for profit.

The rules of closing positions:

1. the estimated time has already elapsed;

2. the estimated profit was made;

3. the estimated losses were sustained;

4. the maximum profit was extracted.