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Proper Risk Management explained by Purse! (FX Related)


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#1 Purse

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Posted 28 January 2018 - 09:05 PM

Greetings Traders,

 

In this thread i want to introduce my personal risk / money management , which does not include any new age fancy instrumets. Therefore mainly aimed on FX, but the right way

 

this is my personal risk management in a nutshell. I not went into deep detail, since its very simple and logical. This money management is my best friend for over 5 years now, never left me behind and done extremely well for me, so it does for you. 

 

 

I´ve wrote down some examples, calculations and narratives together in a word document. 

 

 

 

"The content only belongs to the author and is not availible for sell or any sorts of commercial uses!"

 

 

 

Good Luck!

 

Purse

Attached Files


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#2 Purse

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Posted 29 January 2018 - 05:23 AM

Greetings everyone,

 

to underline my risk management, written down in the word document, i would like to provide recent trading acitivities which applied exactly this sort of management. 

 

 

The date is: 24.01.2018 to 29.01.2018:

 

DZzslU5.png

 

 

 

 

The focus here is not even on the winrate, since its a very modest one, but on the draw down and risk reward potential.

 

Taking a look at the average win, which is equal 770.88 $ and the average loss only 208.62$ we got an an average risk reward ratio of around 1 : 2.74. Also to mention is the largest winner and largest loser.

 

  • Largest Loser 690$ // Largest Winner 3 435$

 

 

 

Of course this example does not represents 0.45% cap profits of every day but way more due further running transactions. However, the profits made within the last 5 days are 6.30% compared to the 10% monthly (0.45%) we want to make, to archieve our goal. 

 

All profits are made with a single transaction risk of 0.15 % - 0.3%. 

 

Smallest trade ive made was 0.2% at risk and the largest trade ive made was 0.3% risk

 

 

As you can see, the winrate of all trades is pretty much just 46.67% (which is a little compressed due test order but anyway) We are maybe at about 55-60% without these test trades. 

 

 

However, the numbers speak for themselves

 

 

 

 

Cheers 

 

Purse


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#3 s3791

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Posted 29 January 2018 - 07:26 AM

Thanks very much for sharing your MM.

I will read them and probably come back to you with some questions.

Regards



#4 HAWK

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Posted 29 January 2018 - 09:39 AM

Bookmarked.

#5 Purse

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Posted 29 January 2018 - 02:58 PM

 

The focus here is not even on the winrate, since its a very modest one, but on the draw down and risk reward potential.

 

Taking a look at the average win, which is equal 770.88 $ and the average loss only 208.62$ we got an an average risk reward ratio of around 1 : 2.74. Also to mention is the largest winner and largest loser.

 

  • Largest Loser 690$ // Largest Winner 3 435$

 

A LITTLE CORRECTION*

 

 

The focus here is not even on the winrate, since its a very modest one, but on the draw down and risk reward potential.

 

Taking a look at the average win, which is equal 770.88 $ and the average loss only 280.62$ we got an an average risk reward ratio of around 1 : 2.75 Also to mention is the largest winner and largest loser.

 

  • Largest Loser 690$ // Largest Winner 3 435$

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#6 s3791

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Posted 29 January 2018 - 04:43 PM

Hi

I read the document you posted and understood your thinking but there are some little calculation mistakes.

 

Risk example 3: 

Daily profit= 0.45%

Risk=0.3%

R:R = 1:1.5

Consecutive losses= 5

max Draw-Down (after 5 consecutive losses)= (0.3%)*5=1.5% 

Break-even recovery trade= 1%

 

What do you do if even the recovery trade is a loss(in this case total loss will be 1.5%+1%=2.5%)?

Do you stop trading for the day or do you start the process from first step?

 

 

As you can see, there are some days where you can potentially loose 2.5% instead of gaining 0.45% so there are some months where you will not reach the 10% target because of these losses.

Did you take into account the effect of the losses in your compounding calculation?

 

Thanks


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#7 Purse

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Posted 29 January 2018 - 10:45 PM

Greetings s3791, thanks for pointing out this little mistake, really, i dont noticed the mistake... but happens. 

 

 

So 5 CL = 1.5% total DD

 

 

Indeed its really possible to even make 6 concecutive losses. However, 6 concecutive losses shouldnt happen on a regular base, but lets try to figure out what to do if. (if that happens frequently, its adviceable to spot the problem in your approach and trying to adjust)

 

 

First of all, let me quote a few lines which i´ve written down in the risk management document:

 

 

Last but not least… This type of management has a downside as well, in case the recover to breakeven trade is going to end up in a loss as well.

At this point we are not going to increase risk anymore, no matter what. I can only suggest you to place recovery trades at the best possible NEXT upcoming setup you can find and never ever try to recover by consecutively position yourself within the same setup!

 

Crucial here ist the next BEST possible setup

 

 

In the meantime keep trading as always with one of the regular risk models and then by chance placing the recovery trade, on setups with the highest possible chance of a win. This way you make sure to still work efficient in an aspect of time. Maybe the meantime even recovers all losses and you can simply keep the higher risk recovery trade for the next one!

 

Its unlikey that the best possible setup appears right away. My advice here is simply to keep on trading with the regular riks models. Therefore anything from 0.15 - 0.30 % in the meantime. The reason why is simply, because you should be able to archieve a RRR of 1 : 3 on a regular basis, which equals.

 

  • 0.45% gain @ 0.15% Risk
  • 0.60% gain @ 0.20% Risk
  • 1.20% gain @ 0.30% Risk

So its advicable to just keep trading one of the common risk models. 

 

 

 

I also noted in the document is:

 

 

 

Only if suitable, but not necessary at all to do any sort of recovery trades

 

By that, not necessary to extend risk on any position, since you would get any draw down back to breakeven or in profit within the next 1-2 trades.

 

 

 

0.3% Risk now equals a total draw down of 1.50% after losing 5 consecutive positions. Technically speaking, you can recover all losses by simply sticking to the above examples, but to safe time and therefore keeping up the efficiency, we are going to increase the risk per transaction simply, because our initial risk in every example is that low. 

 

You have to measure your risk appetite related to your skills. As in any method, a certain winrate is required. If you lose frequently 4, 5 or even more concecutive transactions, you should definately figure out why and try to work around it or fix it. However, you are not going to trade on a 0,45% hard cap. By hard cap i mean, you are not going to close out any position which equals exactly 0.45%, but let possible winners run further as long as it makes sense. 

 

These trades then generate way more returns than just 0.45% which is enormously important for

 

a.) Some nice to have extra gains and

 

b.) To keep draw downs more efficent. 

 

 

 

Means, if you have made like:

 

  • Monday: 0.70%
  • Tuesday: 0.45%
  • Wensday 0.90
  • Thursday: 0.50%
  • Friday: - 1.50%

Then you have made 2.55% in captial gains in total. Now, if you minor the 1.50% of losses, then you are down to 1.05% capital gains this week. The difference now to 0.45% daily over the week is 1.20%. So technically you have to recover only 1.20% for that week to stay in your 0.45% schedule.

 

 

Last but not least...

 

Sometimes its more efficent to simply not work most efficently to keep risk as low as possible at all cost to gain the highest possible rate of control. However, not hitting the weekly cap every week is not the end of the world. You might keep on trading as usual and make it back on top the next week, or the following week. Maybe you even close the month with only 5% profits and make 15% another month. 

 

There are so many ways to return these losses by not increasing any risk at all, but requires patiences and clear vision!

 

 

 

EDIT NOTE:

 

Losses are taken in consderation by having trades, which run further than the inital target of 0.45% to compensate. Without having further running trades and not archieving a R/R of 1 : 3 quite consistantly, it likely to be less efficent. Unfortunately you cant turn any win ratio / risk reward ration approach into good gains. 

 

However, if your strategy does not fullfill the required winrate, the risk/reward and slightly the risk management has to be adjusted. If your winrate is somewhere around 50-60%, you should be more than fine. 

 

 

 

 

I hope that cleared things up and answered your questions

 

 

 

Cheers 

 

 

Purse

 

 

 

Ps:

 

By the way!

 

Are you okay if i put your question into the text document? I would like to add any related crucial question and the answers to the document, so ppl do not have then go throght the entire thread later to find any related important questions made? 


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#8 Purse

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Posted 29 January 2018 - 11:50 PM

Here a little recap on recent trades. Everything what is grayed out are canceled order or test transactions which do not represent any related activity to profit from. Maybe it gives you a better view of how the risk reward ratios / win ratios apply in reality in numbers.

 

9bcf3Kp.png

 

NOTE: All trades taken @5 lots are not related to the explained risk management, since they do represent about 0.5% of risk. However, i am trading for quite some years, know what i am doing and therefore extend my risk approach on certain setups, but only sometimes, but just a bit. Sticking to the mentioned risk management is more than adviceable and fine to do so!

 

 

Cheers

 

Purse


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#9 Purse

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Posted 30 January 2018 - 12:30 AM

Hi

I read the document you posted and understood your thinking but there are some little calculation mistakes.

 

Risk example 3: 

Daily profit= 0.45%

Risk=0.3%

R:R = 1:1.5

Consecutive losses= 5

max Draw-Down (after 5 consecutive losses)= (0.3%)*5=1.5% 

Break-even recovery trade= 1%

 

What do you do if even the recovery trade is a loss(in this case total loss will be 1.5%+1%=2.5%)?

Do you stop trading for the day or do you start the process from first step?

 

 

As you can see, there are some days where you can potentially loose 2.5% instead of gaining 0.45% so there are some months where you will not reach the 10% target because of these losses.

Did you take into account the effect of the losses in your compounding calculation?

 

Thanks

 

ADDITIONAL NOTE: 

 

You would also have position management btw. Means, you wouldnt leave your stops initally where they were when the position ran into profit to whatever extend, related to your trading method. That again, cut off loses by quite something

 

 

Cheers


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#10 Purse

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Posted 30 January 2018 - 01:31 AM

Here again with a little bit of motivation that this risk management is worth it.

 

Order of the day:

 

SijKlBf.png

 

 

Related trades of the day:

 

PUcuA5s.png

 

 

Unfortunately our loser isnt a valid loser, but a double delayed execution of the trade panel i am using. ( Piece of garbage ). 

 

However, we take this into account and do our math. Both trades as been executed at a risk of 0.3% related to their stop size / equity risk (no running trades at that time). 

Frankly speaking, one of the transactions SL were reached quite fast, which caused a temporary loss of 0.30%. 

 

 

 

Now, the second trade, as measurable on the RR scale ( RR scale isnt exactly in place, because ive tightened my stops "Cutting losses" at this point already, but its quite close to the inital stop)  now recovered the entire loss and went even further. This way we archieved a 0.44% gain in plus and a total gain of 0.74% in this particular trade, after the first loss.

 

 

Hope these inside views help out to make things more visual.

 

 

 

 

Cheers

 

Purse


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#11 s3791

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Posted 30 January 2018 - 04:54 AM

Yes, you can put my questions in your document.

Thanks



#12 Purse

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Posted 01 February 2018 - 01:39 AM

Greetings, 

 

i just wanted to add an external source, which explains why high winratios arent necessary, but just porper money management and position management, to make consistant gains and staying profitable

 

 

 

http://www.learntotr...vant-in-trading

 

 

 

 

cheers


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#13 Purse

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Posted 02 February 2018 - 02:18 PM

Greetings again, 

 

once more i want to add an additional source, another comphounding calculator, which gives you additional option to choose from. I´ve already posted one recently, but that one only allowed you to comphound per month and not daily as its supposed to be. Now you can do it!

 

http://compoundaily.com/

 

 

I also put 3 examples for you together, how comphounding effects your returns, by increasing your daily rate of return by an factor of 2x:

 

 

 

 

Example 1:

 

tuXOkjB.png

 

 

 

Example 2:

 

N7o6d6Q.png

 

 

 

Example 3:

 

xdGQ84C.png

 

 

Cheers

 

Purse


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#14 Purse

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Posted 02 February 2018 - 09:42 PM

Additional note for relatively new people to trading or just a reminder about perspectives / narratives, related to post 13#:

 

 

In the above example, you see what gains are possible, by comphounding your investment per transaction day over day for an entire year.

 

Frankly speaking, many participants of this scene are defined by narrations for whatever reasons, in fact the reality is a different one. 

 

You probably and most commonly heard how much daily / monthly gains some1 has made... 20%, 30%, 50% net capital gain or evene more. Some might even say 60 - 100% per month. 

Now... Just hold on a second and take a look at the second and third daily comphound example. 

 

 

The second daily comphounding example results in a monthly return of 20,24% capital gain per month with 2.729% per annum.

 

The third daily comphounding example results in a monthly retun of 40,48% capital gain per month with 77.563% per annum.

 

 

Simply said... If you get in touch with some1, building a narrative around these gains, telling you about massive monthly returns, high and consistantbeyond 20%% or just 15%, your level of awareness should be very, very high at this point.

 

Even a monthly return of 15%, capped at a daily rate of return of 0.68%, comphounded over an entire year results in 1.086% of capital gain per annum. 

 

Beside the fact, that anybody whos making these sort of consistant gains, day after day, would literally bankrup any sort of retail broker within half a decade on a very small inital investment, simply by comphounding. 

 

However, this gives you some perspective / narrative related math at your hands to experience your journey in a better, less naiv and time consuming way, by simply avoiding narratives build around those numbers, because... well, its existance is quite doubtful 

 

(Not necessarily at all, but sure is, you wont find anybody in the worlds worst web, especially not here, whos presenting you such opportunities of related returns) If so, its simply proven by not trading on a budget of just 10.000 not 100.000 and not 500.000, but beyond a million at  least, because a million isnt a problem of effort anymore. However... this person should have at least a massive initial capital availible, which is simply verified through an investor passwords, a screen to screen share of that persons portfolio / account ect. IN CASE that person is offering you any sort of service! (Which is unlikely tho)

 

 

FINAL NOTE:

 

If someone is telling you, hes making 40-50% a month, doesnt necessarily means hes comphounding daily (or at all, what doesnt make sense), because he simply isnt able to make consistant profits day over day, but maybe per week, which then flacuates.

 

That person technically could´ve comphounded the same to the end of the month as when he would have made daily consistant profits, simply by breaking down his daily/weekly returns and recalculate the next days, 2 days, 3 days ect. necessary returns to compensate negtaive days / weeks. However... that requires consistant recalculation of every days profits, alot of recalculation of risks / profits, Risk Reward Ratios and more and is therefore not just made within one minute, but takes quite abit of math in a excel sheet to get that done every day / week without getting headache every day.

 

Very unlikely that the average trader is running such a complexe comphounding model / recalculation base.

 

 

 

 

Cheers 

 

Purse


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#15 Purse

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Posted 04 February 2018 - 03:04 AM

Fixed Vs. Percentage-Based lot size. What is better?

 

 

Example below:

 

CYLMC5z.png

 

Cheers

 

Purse


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