Since i've received some messages about Money management related to one of my posts in another topic, therefore I answered to them all and my last response got quite long and I have found it suitable to post as an instruction here.
I have mentioned in a post that a good trader with 30 percent of winning rate would be more profitable rather than a bad trader with a 90 percent of winning rate. I got a message which asked me how it is possible and what would be a good MM.
I'm trading live for 1 year but assume myself as beginner yet nevertheless I'll share my response based on my personal experience here. some traders might find it useful.
It always depends on your deposit and size of stacks. I'll try to explain a bit.
suppose you have 80 percent of win rate which is very impressive. it means 8 win and 2 losses out of 10 trades. let's assume the payout of winning trade is 80 percent as well. you would win let's say 8 trade with size of 100 euro and lose 2 with size of 10. then good for you. simply you have made 8*80 - 2*10=620
but what if it is opposite? ( 8*8)- (2*100)= -134 which is unpleasant.
Now let's see 30 percent win rate: 3 winner with size of 100 and 7 loses with size of 10 then you will have (3*80)-(7*10)=170
opposite will be disaster of course.
So far we saw the 80 percent ITM might cause -134 losses while 30 percent ITM would generate +170.
but about Money management you have to adjust the best one based on your average win rate and the size of your deposit. let's assume your winning rate is 60 percent and your deposit is 100 euro.
first of all in any situation I suggest you to keep the size of stack constant if at least until achieving your daily goal. so if you start with 10 euro then stick until achieving the goal.
Many people suggest the ratio of 5 or 10 percent of deposit for each trade but I don't believe it. You should trade the amount which you don't care that much about. I was student when I started trading. my initial investment was 200 euro but still 10 euro was money for me since i could live 2 days with it and i didn't have any other income. so I have started with just 2 euro which was a price of a coffee. I would be indifferent or I would stop drinking my morning coffee for a while.
So if you invest 100 then your max size of stack should be 5 and not more. if you want to take bigger trade then increase your deposit as well. It is based on psychological research of Kahneman-tvorsky loss thorium about loosing pains.
OK. Due to your winning rate assumed as 60 percent you will make (6*4)-(4*5)=4
if your strategy has 60 percent wining rate perhaps it would generate a lot signal so let's say you will make a 30 trades a day which yield you 12. not that much huh? go back and read my -134 loss with 80 percent win rate again.
you might tell me I would martingale and cover since i have 80 percent winning rate. very good then but how do you know whether your 6 loosing trades are distributed among let's say 30 trades. If that 6 loosing fall in the row you would easily diminish a much bigger deposit in a second. if you martingale a 5 euro for 6 times you ought to invest almost 1220 euro to cover it. even the 3rd one will cost you 78 euro after loosing a 12.5 and 31 of course.
lose is part of the trades so easily neglect it. Now some personal rules that i use.
By myself i stop trading after 3 losses in the roe and come back tomorrow. every moment i set the lower limit and higher goals for myself.
for instance i start my day with 1350. I put the goal of 1500 but i will never trade if i touch the 1300. lets assume i start and win some trades and become 1400 then my lower limit will be 1350 and when i reach 1450 my Lower threshold is 1400.
My goal are also progressive. so I see for example 1450 as a peak of the mountain. I'll attack it twice and If i can't reach it I'll stop trading for the day.
Now I have 2 very interesting news for you. Do you remember that you got 12 euro first day and you'll get somehow disappointed? with exactly that 12 percent increase you'll make 3833 euro in the end of the month.
I have no Idea about you but I remember the first month that i made near 8000 euro out of 200 I was yelling just wow and wow for a week. take it in the consideration that i had faced just losses for about 6 month before that with the same strategy but bad money management.
second good news for you: I use snowball or compound martingaling but I will not suggest you now until you can fully control your emotion.
I take 1 trade and if i win the size of next trade will be the initial investment plus the profit. I'll do it until 4th time. If I loose in the middle i have just lost my initial investment and nothing more. I'll explain you better with example
my trade size is 10 for example:
1st trade : win profit : 8
2nd trade: win invest:(10+8) profit:14.4
3rd trade:win invest (18+14.4) profit: 25.92
4th trade: win invest (32.4+25.92) profit: 46.65
so if you lose at any step still you have lost just your initial 10. but if you win once the 4 compound then you can afford to start 4 other times a new compound. it needs some confidence, patience and believe. just consider when your winning rate is higher and which trade are least risky.
always think about that 12 euro of first day and 3800 of the end of the month. I am sure you can do it. Just trust yourself and Do not over trade. when the market signaled you to stop accept it and obey.