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Money Management Question

I recieved the following from one of my list members yesterday: 

Hi John,

The most important question that I try to answer(with help from other traders, courses and books – your excellent book including) is:

How to keep as much of my earned profits as possible?

Today I know that the most important part of my strategy is money management(I use Fixed Ratio). I chose FRatio because I trade systems that are always on market. So there are no stop orders. So I have to use a money management strategy that uses system’s drawdown.

I had many situations when I had deep drawdown periods after nice profits. Unfortunately, in drawdown I had more contracts(because of earlier profits) so even if my losses in points per contract were similar to my earlier profits, my net loss was bigger because of the biggest amount of contracts at the beggining of drawdown periods.

Is there any smart way to improve results of my money management method?

Two years ago I tried to take out of the market a part of my profit from every profitable trade(usually half of it) and didn’t reinvest that part, but it doesn’t work good…

I think my question should be:

Is it possible to improve a profit factor of my money management strategy? 

Best regards,

K.D.

The whole concept of risk and money management is something that I’m finding to be perhaps the single most misunderstood element of trading – not just for new traders, but for experienced ones alike. There is a strong tendency to think of it only as protecting one’s self against outside losses, but that’s only part of the picture. I’ve actually decided to begin working on a very intensive educational program on the subject. I’ll keep you posted on my progress.

The short answer to K.D.’s question is “Yes”. In the end, money management comes down to position sizing. When you can optimize (or nearly so) your position-sizing you can improve your overall trading performance. The primary drawback to fixed ratio sizing is that while drawdowns tend to be shallower, they also take longer to come out of because of the smaller trades during the trough periods. What K.D. might want to look at is a stepped type of approach as I discuss in my book. It’s a sort of mix between fixed lots and fixed ratio.

By John

Author of The Essentials of Trading

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