Money Management – The Holy Grail Of Trading   no comments

Posted at 4:02 am in News

Money management determines the amount of risk in each trade. This risk is a vital element of any trading system – too much risk and the chances of going bust are too high, too little and the reward for trading is too low. The main methods for calculating trade size are: Fixed fractional number of commercial contracts is determined by a fixed percentage of current equity. As all futures contracts can be traded only with this, in effect, means that the trader uses 1 contract per $ x of equity. For example, a contract for $ 10,000. Fixed fractions, however, requires the achievement of levels of inequality in different contract.

For each contract of a $ 10,000 contract to spend 1-2 requires a gain of $ 10,000 a contract. To move from 10 contracts to 11 still requires $ 10,000 profit but from 10 contracts. So for smaller account sizes it will take much time for the administration money really come into play and the larger the number of contracts traded jumps around violently. Using fixed fractional the number of contracts traded is calculated as equity / x, where x = dollars per contract ($ 10,000 in the previous example). Contracts – social capital required $ 1-10000 2-20000 3-30000 4-40000 5-50000 6-60000 fixed ratio Fixed ratio adds a variable to the fixed fractional method.

Fixed ratio adds delta to the calculation. The delta is a factor that is required to move to the next level contract. The lower the delta the more aggressive the money management is. The formula is: social capital required to trade previous contract size + (number of contracts x delta) = the next level. For example, from a base of $ 10,000 per contract of 1 and a delta of $ 5,000: Contracts – social capital required $ 1-10000 2-15000 3-25000 4-40000 5-60000 6-85000 The Comparing the table above that of fixed installments can be seen in the lower levels of the account will require less capital, as the account grows the number of contracts traded becomes less aggressive.

Written by admin on December 17th, 2010

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