Friday, December 08, 2006

Money Management - The Holy Grail Of Trading

Money management determines how much to put on the line on each individual trade. This is a critical component of any trading system - hazard too much and the opportunities of going flop are too high, hazard too small and the reward for trading is too low.

The chief methods for calculating merchandise size are:

Fixed Fractional

The number of contracts to trade is determined by a fixed percentage of current equity. As lone whole hereafters contracts can be trade this, effectively, intends that the bargainer utilizes 1 contract per $x of equity. For illustration 1 contract per $10,000.

Fixed fractional, however, necessitates unlike accomplishment at different contract levels. For 1 contract every $10,000 to travel from 1 contract to 2 necessitates a net income of $10,000 from 1 contract. To travel from 10 contracts to 11 still necessitates $10,000 net income but from 10 contracts. So for smaller account sizes it will take a long clip for the money management to actually kick in and for larger account sizes the number of contracts traded will leap wildly around.

Using fixed fractional the number of contracts traded would be calculated as equity/x, where x=dollars per contract ($10,000 in the above example).

Contracts - Equity Required $

1 - 10,000

2 - 20,000

3 - 30,000

4 - 40,000

5 - 50,000

6 - 60,000

Fixed Ratio

Fixed ratio adds a variable to the fixed fractional method.

Fixed ratio adds delta to the calculation. The delta is a factor which is required to travel to the adjacent contract level. The lower the delta the more than aggressive the money management is.

The expression is:

equity required to merchandise former contract size + (number of contracts x delta) = Next level.

Eg starting with a alkali of $10,000 for 1 contract and a delta of $5,000:

Contracts - Equity Required $

1 - 10,000

2 - 15,000

3 - 25,000

4 - 40,000

5 - 60,000

6 - 85,000

Comparing the above tabular array to that for fixed fractional it can be seen that at the lower account degrees less equity is required whereas as the account turns the number of contracts traded goes less aggressive.

0 Comments:

Post a Comment

<< Home