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Money Management System

Posted on 05/11/2007 10:03:22 | Link | Post Comment
I keep raving about this, but I'm continually impressed by how much peace of mind my money managment system delivers, and also how it affects performance positively. Nothing complex, just using exact fixed fractional entries based on my stop loss size (which can thus go anywhere).

So the method for fixed fractional entries goes like this:

1) I see a potential trade lining up and consider my entry point.

2) I look for where my stop would go and calculate the distance between it and my entry.

3) I consider my target level to get a rough idea of the risk/reward ratio. 2:1 is acceptible, but no more than that. Preferably I prefer to be risk 1% to go for 1% or greater. This tells me that this trade is either a go or not.

4) Using the number of pips between my entry and my stop I work out my position size so that if my stop gets hit I lose exactly 1% or 2% (depending on how confident I am about this trade).

Due to the above, I simply do not sweat about stop losses anymore, and they go where I think they should go. If I have mastered anything in trading thus far, it is money managment. I've got it totally under control, and as any decent trading book will tell you this is at least one third of the puzzle. Now that I do this, the old way seems like complete madness which was to place a stop based on how much I felt 'comfortable' losing. WRONG WRONG WRONG!

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