Money management is an important part of a trading system, essentially the part of the system that determines the size of your positions. It can determine how much profit you can make and how much risk you can take in trading the system.
The importance of money management
It is often said that successful trading = psychological control + money management + analysis system. However, in fact, most people ignore the issue of money management.
Next, let's make a money management game: let's make a game with a winning rate of 60%. You have 1,000 yuan, and you have 100 chances to bet, and the odds are 1:1. So, how do you place your bets to get the most bang for your buck? When reading the following, I suggest you think about this question first. According to surveys, the average person tends to place more bets in unfavorable situations and less in favorable ones. Reflected in the market, people often expect a rise after several consecutive falls. Or after several consecutive rises, a fall is expected. But this is just a gambler's fallacy, because the chance of profit is still only 60%. At this time, money management is extremely important.
Suppose you start the game with $1,000 and lose three times in a row (which is very easy in terms of probability), and now you only have $700 left in your bankroll. Then, most people will think that they will win the fourth time, so they increase the bet to 300 yuan (the 300 yuan they want to recover the loss). Although the probability of losing four times in a row is not high, it is still possible. Then, you only have 400 yuan left. To recover the loss in this game, you must make a profit of 150%. The chance is not great. Suppose you increase the bet to 250 yuan, then it is very likely that you will go bankrupt after four games. In either case, profit cannot be achieved in this simple game. Without the concept of money management, the risks taken are too great, and the balance between risks and opportunities is not struck.
It is believed that 70% of the people in the transaction lose money, 10% of the people do not lose or make money, and only 20% of the people make money. Move from the 70% who are losers to the 10% who are at least not losing. If you get knocked out, it's impossible to get the deal done. You have to make sure you can keep trading. However, most traders are often wiped out before they have a chance to win. With a little bad luck, they will lose all their previous efforts. It is very necessary to continue to stay in the game. Think about it, if a little tweaking of your approach could save the day, what would you do? You just have to survive and let capital ride through the inevitable trough. You need to make sure that your time is long enough to equip you with the skills and information necessary to be a successful trader.
Money Management and Stop Loss
People always like to make quick profits and leave a little room for losses. The result is to cut off profits and expand losses. How to achieve capital appreciation in the long run? Let us remember these figures: a 20% loss requires 25% profit to break even, which is relatively easy; a 40% loss requires 66.7% profit, which is difficult to achieve; A 100% profit is required, and it is almost impossible to turn a loss. As far as my personal experience is concerned, a 20% loss should be the limit of loss.
However, this kind of stop loss is not fund management, because this kind of stop loss does not tell you how much to sell, and it is impossible to control the risk through position adjustment. Money management is an important part of a trading system, essentially the part of the system that determines the size of your positions. It can determine how much profit you can make and how much risk you can take in trading the system. We cannot replace the most important part by simply setting a stop loss managed by such currencies.
Fund Management and Analysis System
Going back to our previous game, the basis of profitability is the winning rate. In other words, the buying and selling points suggested by your analysis system must be able to generate profits in the long run. On the basis of having an effective analysis system, the role of fund management is to make the analysis system serve itself effectively through appropriate position adjustment and fund management. For the game above, we can assume that an analysis system has a 60% win rate, but nothing more.
If it is used improperly, there will also be huge losses (as mentioned above, it is not difficult for us to understand why the investment performance is completely different when using the same analysis system in trading). In this game, if I simply bet 10 yuan each time, then my capital will reach 1200 yuan in the end. Of course there are better ways to bet. Comparing the several betting styles for example, it is clear that different betting styles produce completely different results. It can be said that understanding the importance of money management begins to understand one of the biggest secrets of trading.
Section 2 Fund Management Strategies
There are countless money management strategies, and professional gamblers have long claimed that there are two basic money management strategies: the equivalent martingale strategy and the anti-equivalent martingale strategy. In a losing trade, the equivalent martingale strategy increases the stake size when the capital decreases; on the other hand, the inverse equivalent martingale increases the capital in a winning trade or when our capital increases.
If your risk continues to increase in a series of losses, there will eventually be a series of very large losses that can cause you to go bankrupt, because the equivalent martingale strategy is hugely risky. The anti-equivalent martingale is taking more risk after a string of winnings. In the investment world, smart investors will increase their investments within certain limits when they are profitable. There are as many money management strategies as there are market entry rules. The following are the fund management modes of anti-equivalent martingale.
1. One unit per fixed amount. This model only allows you to buy a position with a certain amount of money, it basically treats all investments equally and always allows you to hold a position.
2. Equivalent unit model. The model gives equal weight to all investments in the portfolio according to their fundamental value.
3. Risk percentage model: Its fund adjustment rule is based on the risk as a percentage of capital. Gives all trades the same level of risk and allows for steady portfolio growth. This model is best suited for long-term trend followers.
4. Volatility percentage model: Provides a reasonable balance between risk and opportunity. This model works well for trades with tight stops.
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