Money Management - How to increase trading results
I need to make this educational post, because so many traders are focusing on wonder trading strategies, and they are forgetting about the money management, which is in my opinion, the real secret tool in maintaining a positive equity on long term.
The way trading is advertise, with 6 monitors and 10 indicators needed to take a decision, is just to impress people.
Every single indicator, has a certain win ratio, most of them a minimum of 30%, where the only unknown variable is the trades results sequences. This means than even though you should get3 wins and 7 losing trades out of 10, you might end up with 15 consecutive losing trades, but referring to a sample of 100 trades, you might have still a 30% win ratio.
In the example above, I have used only MA100 on a 4h time frame. You can see 10 trades with the following results sequence
Loss Loss Win Loss Loss Win Loss Win Win Win
There are 10 trades in total, with 5 losses and 5 wins
This would have been extremely profitable, because using a 2 RRR for trades, supposedly 1000USD SL/trade, you could have ended up with a loos of 5000USD and a win of 10.000USD, or a total profit of 5000USD
Off course, this is a good scenario, but because any trading strategy has ups and downs, you need to be prepared for down periods.
What you need to do, is to create a plan on how to approach each trade based on a sample of trades. What I mean by this, is that the results of each individual trade is not decisive in your trading plan, but the result of the trades sequence, is what you need to focus on.
Lets look at this following example in order to understand what I mean
The result sequence for this 10 trades is like follows
Loss Loss Lose Loss Win Win Loss Win Loss Loss
Here we have a string of 4 losing trades and only 3 wins out of 10 trades, this means that, same as in the first example, we have 3 wins with 2RR or 6000USD and 7 trades lost. Overall a negative 1000USD
But, here comes my little secret. The way I am increasing my average profit/trade, is to increase the RR and volume, BUT, to a limited sample or sequence of trades.
SO what you can see is like this
Trade 1 - 2RR Loss - 1000USD
Trade 2 - 2RR Loss - 1000USD
Trade 3 - 2RR Loss - 1000USD
Trade 4 - 3RR Loss - 1000USD
Trade 5 - 3RR x1,5 WIN = 4500USD
Here, I am positive 500USD At Trade Number 5 Regardless if it is a win or a loss, I decide to stop increasing to RR or volume. If trade 5 is a win, I will restart the cycle, and if trade is a loosing trade, I will keep the same RR and Volume. Of course, it is up to each individual when you want to stop.
Trade 6 - 2RR Win = 2000USD
Trade 7 - 2RR Loss - 1000USD
Trade 8 - 2RR Win = 2000USD
Trade 9 - 2RR Loss - 1000USD
Trade 10 - 2RR Loss - 1000USD
Results after 10 trades = positive 1500USD.
So with a simple rule that will modify the volume and RR to trades on a limited sequence of 5 trades, will increase the profitability of the strategy. Instead of having -1000USD, it ended up with a positive 1500USD after 10 trades.
This small money management trick has proven profitable long term for myself.
Fell free to test yourself, and ask if something is not clear.
Don't Stumble Trading. Trade Safe!
The way trading is advertise, with 6 monitors and 10 indicators needed to take a decision, is just to impress people.
Every single indicator, has a certain win ratio, most of them a minimum of 30%, where the only unknown variable is the trades results sequences. This means than even though you should get3 wins and 7 losing trades out of 10, you might end up with 15 consecutive losing trades, but referring to a sample of 100 trades, you might have still a 30% win ratio.
In the example above, I have used only MA100 on a 4h time frame. You can see 10 trades with the following results sequence
Loss Loss Win Loss Loss Win Loss Win Win Win
There are 10 trades in total, with 5 losses and 5 wins
This would have been extremely profitable, because using a 2 RRR for trades, supposedly 1000USD SL/trade, you could have ended up with a loos of 5000USD and a win of 10.000USD, or a total profit of 5000USD
Off course, this is a good scenario, but because any trading strategy has ups and downs, you need to be prepared for down periods.
What you need to do, is to create a plan on how to approach each trade based on a sample of trades. What I mean by this, is that the results of each individual trade is not decisive in your trading plan, but the result of the trades sequence, is what you need to focus on.
Lets look at this following example in order to understand what I mean
The result sequence for this 10 trades is like follows
Loss Loss Lose Loss Win Win Loss Win Loss Loss
Here we have a string of 4 losing trades and only 3 wins out of 10 trades, this means that, same as in the first example, we have 3 wins with 2RR or 6000USD and 7 trades lost. Overall a negative 1000USD
But, here comes my little secret. The way I am increasing my average profit/trade, is to increase the RR and volume, BUT, to a limited sample or sequence of trades.
SO what you can see is like this
Trade 1 - 2RR Loss - 1000USD
Trade 2 - 2RR Loss - 1000USD
Trade 3 - 2RR Loss - 1000USD
Trade 4 - 3RR Loss - 1000USD
Trade 5 - 3RR x1,5 WIN = 4500USD
Here, I am positive 500USD At Trade Number 5 Regardless if it is a win or a loss, I decide to stop increasing to RR or volume. If trade 5 is a win, I will restart the cycle, and if trade is a loosing trade, I will keep the same RR and Volume. Of course, it is up to each individual when you want to stop.
Trade 6 - 2RR Win = 2000USD
Trade 7 - 2RR Loss - 1000USD
Trade 8 - 2RR Win = 2000USD
Trade 9 - 2RR Loss - 1000USD
Trade 10 - 2RR Loss - 1000USD
Results after 10 trades = positive 1500USD.
So with a simple rule that will modify the volume and RR to trades on a limited sequence of 5 trades, will increase the profitability of the strategy. Instead of having -1000USD, it ended up with a positive 1500USD after 10 trades.
This small money management trick has proven profitable long term for myself.
Fell free to test yourself, and ask if something is not clear.
Don't Stumble Trading. Trade Safe!
