One trader lost ($3000) during the course of a year trading one contract of system A. Another trader makes $25,000 trading the same system that year. One trader makes $24,000 trading system B one year while another makes from that same system $79,000, both with the same starting capital. What is the difference between these traders?INSIDE THIS REPORT..
1. MONEY MANAGEMENT - THE MATHEMATICAL PROCESS OF INCREASING AND DECREASING THE NUMBER OF CONTRACTS/SHARES/OPTIONS. THE PURPOSE OF UTILIZING MONEY MANAGEMENT SHOULD BE TO INCREASE THE PROFITABILITY DURING POSITIVE RUNS AND PROTECT THOSE PROFITS DURING DRAWDOWNS OF ANY TRADING SYSTEM OR METHOD.
Money management is what allowed Larry Williams to trade $10,000 into $1.1 million within one year. According to Larry, if he had traded ONE CONTRACT on every single trade, profits that year would have been only around $100,000. There were two aspects to Larry's record setting trades: 1) The system and strategies he used to determine where to enter and exit trades; and 2) the method he used to increase and decrease the number of contracts to place on any given trade. To put it simply, only 9% of the total profits came from the system and strategies used to determine where to enter and exit trades while 91% of the total profits that year came from the money management strategy he applied. Money management alone increased Williams' return by 1000%!90% - 95% OF ALL TRADERS LOSE MONEY
This is a statistic that I have heard for years on many different occasions and from a number of reliable sources. In my own experiences hearing from other traders, I could not offer any data to the contrary. Here is another piece of interesting data I think is correlated to this statistic. 90% - 95% of all traders spend hundreds of hours and thousands of dollars trying to figure out where to enter and exit the market while they barely even put a thought towards how much risk to place on each trade and when to increase or decrease that risk. I seriously doubt that these two statistics are the same by coincidence.NOT JUST MONEY MANAGEMENT, BUT THE RIGHT MONEY MANAGEMENT
Before we further explore the power of money management, it is important to clarify that not just any money management should be applied to trading, but proper money management.STOP HERE FOR A MOMENT
Before reading further, the previous illustrations should have left one very big impression about how powerful money management can be. Let's take the time to re-assert a few things before we go on.
2) It's really up to you.
3) Increase one contract for every $10,000 in your account.
4) X% of your account on each trade. (this will probably range from about 2% to 10%.)
5) Increase when you double your money.
After receiving one of these answers, read the following and decide for yourself whether you should take their advice or not.TRADITIONAL FIXED FRACTIONAL MONEY MANAGEMENT
The most widely understood technique of money management, especially among professional money managers, is called the fixed fractional method. This method simply risks X% of your money on each and every trade and is the method used in our coin tossing example. If you expect your largest possible loss to be $1,000 in a $20,000 account and you wanted to risk no more than 5% of your account balance on every trade, you would trade one contract for every $20,000 in your account. ($1,000 / .05 = $20,000) When the account is built up to $40,000, you would then be able to increase the number of contracts to two. When you reach $60,000, you will increase to three contracts, etc. You would increase or decrease contracts by one for every $20,000 you have in your account. This is the most commonly used method in the industry today. However, there are some problems with this type of method.PROBLEMS WITH FIXED FRACTIONAL
Fixed fractional trading is an objective process that is fairly simple to implement. But, is it the most practical and logical? The answer is no. Fixed Fractional trading has several drawbacks. For the average trader, a typical account to start trading is about $20,000. Implementing the same scenario of maximum loss per trade of $1,000 and risking no more than 5% on each trade requires you to produce a 100% return before you increase from trading one contract to two contracts. Further, if your largest loss exceeded $1,000 you would be required to break your own rule just to trade one contract. For example, if your largest loss is $1,500 instead of $1,000, you are risking 7.5% of your account balance right off of the bat ($1,500 / $20,000 = 7.5%). You either have to break your own rule or start with $30,000 instead of $20,000 in the account. At this point it would take you $30,000 in profits before you ever increase from one to two contracts.FIXED FRACTIONAL'S MASSIVE DRAWDOWNS
If the method being used in the above scenario to increase from 20 to 24 contracts has average profitable trades in the range of $1,000 to $2,000, this will cause the money management system to skip contracts at higher levels. If you make it up to twenty contracts (which also means your account balance is at least $130,000 ($6,666 x 20) and you have a profitable trade of $1,300 and jump up to twenty-four contracts on your next trade, what happens if a drawdown occurs? Let's say your worst drawdown is only $5,000 (which is far better than most realistic drawdowns). If your worst loss is only $1,000, that means your drawdown has to be spread out between at least five trades. To be conservative, we will say that these five trades occurred consecutively rather than simultaneously (five open positions at the same time at twenty-four contracts a piece).ONE CONTRACT DOR EVERY $10,000 IN YOUR ACCOUNT
This is actually just a different way of saying X% risked on every trade. In the previous example using a $1,000 largest loss, one contract for every $10,000 would come out to 10% being risked on each trade ($1,000 / .10 = $10,000). Therefore, the ridiculous discrepancy in time between increasing from one to two contracts and nine to ten contracts is still the same. The drawdown risks are the same with any fixed percentage being risked on each trade.BIG. The only difference is HOW big.RISKING 2% ON EACH TRADE
It amazes me how many vendors in the industry push this money management method. This may be good for managed funds with millions of dollars, but it is totally impractical for individual traders with average accounts. I need only make one illustration to prove my point. If you have a $20,000 account, you can not trade unless the risk on each trade is at or less than $400. If you have a $50,000 account, you can not take a trade with a risk of more than $1,000. Further, if your maximum risk is only $1,000 with a $50,000 account, you can not increase contracts until the account increases to $100,000! You can not increase to 3 contracts until the account reaches $150,000.THE SOLUTION - FIXED RATIO MONEY MANAGEMENT
Back when I was researching all of the different type of money management and getting frustrated at the various pros and cons, I ended up scrapping everything there was and developing my own. The method I developed is called Fixed Ratio Trading. Before I get into the logic of Fixed Ratio, let me review a few examples of what the Fixed Ratio money management method can do for systems like the ones you trade right now.
Results trading just one contract were as follows:
Total net Profit $25,830
Total Net Profit $204,000How about a position trading system in the Bonds?
Total net Profit $44,652
Total Net Profit $462,787
A better than TEN FOLD increase in profits while only increasing the drawdown by 5%! Is this something you should apply to your trading?THE LOGIC BEHIND THE FIXED RATIO METHOD
I realize some of you may be saying that a fixed fraction and a fixed ratio are the same thing. But, in fact, they are referring to two different subject matters.and that is the difference. The fixed fractional method is referring to what percentage of your capital should you risk on the next trade, and every trade thereafter. The Fixed Ratio method is referring to difference between each increase and decrease. This is the key.Now for the illustration:
My PowerTrade S&P XT method made $39,500 based on a single contract from January 1st through the end of April this year. The worst drawdown hit $12,500. Using a delta of $5,000, profits were increased to $104,000 trading 6 contracts. This means that with a $2,000 single contract loss, the drawdown would be $12,000 or 11.5% of the profits. This, by the way, is not "the best" ratio to use in this scenario if you are looking for profitability.APPLYING MONEY MANAGEMENT TO YOUR TRADING:
The purpose of this article was not necessarily to promote my Fixed Ratio method above the fixed fractional method. The purpose of this article was more to open your eyes to the power of proper money management and encourage you to look further into the subject. Don't take my word for it, do your own research and see if the principles outlined in this article are not true. Having not even begun to scratch the surface, money management is the most powerful aspect of trading when it comes to your bottom line. It could mean the difference between your ultimate success or failure in trading.
Sound money management is essential to success in spread betting or any other form of financial trading. Without money management you will find yourself running up untold losses and with a margined product such as spread betting or contracts for difference (CFDs) you will find these losses can accumulate quicker than you might expect.So what really is money management and what strategies can we use to ensure we have sound money management in place?
Money management in spread betting is not keeping track of all the accounts you have your money in, although that is important too. No, money management is knowing how much money you stand to lose on each trade and if there are any other fiscal risks involved. For instance you may use a percentage of total funds strategy to risk on each trade. This is a great strategy as it determines how much money you stand to lose on each trade, how may trades you can get wrong before you go broke and if you should actually make the trade. If a trade comes along that doesn’t meet this risk criteria then you should move on to look for another or wait until an opportunity comes along that fist with your money management strategy. The best way to explain this percentage of fund strategy is by an example.
Lets say you have a spread betting account with £10,000 in it, or you have two accounts with £5,000 in each. Either way your total fund is £10,000.
Next you want to determine how much risk per trade you are willing to make.
Personally I like to try and stick to 1% per trade. Occasionally I have gone over this but as a rule of thumb 1% max. If you are new you may want to consider risking less than this. Try 0.5% or even 0.25% until you get more comfortable with trading.
If we use 1% that means we should risk no more than £100 per trade. 1% of £10,000 = £100
Using 1% risk pre trade means we would have to get 100 losses in a row to loss all our money. While this is possible it’s not very probable. If you find yourself in a situation where you have lost say 50% of your account I would strongly suggest you need to re-asses your strategy. Stop trading for a while and take a break. Read some more and try to find out where your strategy has been failing. Once you think you have identified the issues try paper trading or trade again with much lower stakes. Some companies such as FinSpreads offer £0.10 for the first 8 weeks*. This can be invaluable when you are just starting out.
The important thing to remember is don’t start trading at £10, £20, £50 or even £100 per point if it doesn’t meet your risk critera. It’s easy to get suckered in by the temptations of big gains that £100 per point offers but remember you can just as easily lose at £100 per point as you can win. In fact I would say it’s much easier to lose money than make it, especially if you are new to trading.
Trading takes time to learn and develop. Remember there is no rush, take your time, learn the ropes and hopefully you will succeed. I wish you all the very best in your trading.
*at the time of writing FinSpreads offer £0.10 per point trading for the first 8 weeks. This offer may vary from time to time or may no longer be available. Please check with FinSpreads for the latest offers and terms and conditions.
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An Online Guide - How to Profit Through Financial Spread Trading
BetOnMarkets offers an excellent way to bet on the financial markets with limited risks and all profits are also tax free under UK law (subject to change).
In order to profit, you need to be disciplined with your capital and also follow a good trading strategy. Opinions differ but the best strategies are the ones which you back-test and refine yourself.
In order to last as a trader and to increase your trading capital it is very important that you do not overtrade nor risk too much on any one trade. Good money management is a must!
First of all you need to decide how much you will fund your account with. This money should not be borrowed and preferably should be from your savings i.e. money you can afford to lose but it will hurt to lose it.
BetOnMarkets allows you to bet as little as Ј5 and sometimes even less. This means that you could operate an account as small as Ј500 and risk only 1% per trade.
This sounds like a small amount but bear in mind that BetOnMarkets provides 7 indices, 25 US Stocks, 11 UK Shares and 14 currency pairs which you can trade. So that's a total of more than 50 financial markets you can choose from. This means that you will probably be able to find a few good trades per week.
Plus, by keeping your stakes small, you will stay in the game even if you make a few mistakes along the way.
A sensible way to setup your account would be as follows (this is just a suggestion, you may be happier risking more or less per trade):
If you have a Ј1000 account and you are risking Ј10 (1%) per trade then you would have to be constantly wrong about the market over 100 trades to lose your entire pot. However, if you decided to risk Ј100 (10%) per trade, it is more likely that you will lose all of your capital as a short losing streak will wipe you out.
The following table shows the gains you would need to make depending on how much of a starting bank of Ј1000 you lose:
Please note: If you take a longer term view on a bet then your odds may be very large.
For example: The Dow is trading at 10450 but you think it will rise over the next 3 months. In that case you could choose a long term "One Touch" bet:
e.g. I wish to win Ј15 if at any time within the next 90 days the Dow Jones Index trades at or through 11080
YOU wish to win GBP15 if at some time before 23-Aug-05 (inclusive), Dow Jones Index touches 11080.
The cost of this bet is GBP4.9
(The odds on this bet are approximately 35/17)
Your net profit is GBP15-GBP4.9 = GBP10.1
which represents a +206% return on your GBP4.9 investment.
So, because you have taken a very long term position, you total risk is less than Ј5 but the return if you are correct is three times your stake. Of course, if the market moves quickly upwards, you can sell your bet back for more than your stake and make a quick profit.
Decide how much your can safely afford to lose and put this money to one side as your "play" money. Then you need to decide your maximum risk per trade. Stick to a small risk per trade and you will not be wiped out with a few losing bets. As you trading capital increases, your risk per trade will also increase.
This is a discussion on Spread Betting Money Management within the Psychology, Risk & Money Management forums, part of the Methods category; Apologies if there is a lot of info about on this, I havn't managed to find out any though. After .
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Trading strategies aside for now, as all i want to highlight is how i size my position. Personal I like to see a 3:1 reward to risk ratio before I trade.
Let's assume I want to take a long position on a stock at Ј10.1 (101 points) with a stop loss at Ј9.1 (91 points) and my target price is Ј13.9 (139 points)
My Trade risk is my Entry Price - Stop Loss = 10 points (101 - 91)
My reward is Target Price - Entry Price = 38 points(139 - 101)
REWARD /RISK ratio is 38/10 = 3.8 . All other trading strategies being considered, I will trade this stock.
Position size is my risk per trade (Ј100) / Entry - stop loss (10 points) = Ј10 / 1point.
- This means my max point per trade on this stock is Ј10. Ofcourse I can decide to bet less than Ј10 but definitely not more than Ј10 / per point.
I have ingrained the saying "Plan the trade and trade the Plan".
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