Guys

As ever I thank you for your support and encouragement. I have used demo accounts in the past but I'm even less disciplined with them than with real money. I actually get on better with paper trading when I'm trying something out.

Onwards and Upwards

Michael

Hi all

I've taken myself right back to basics this time and learned that proper money management turns some of my beliefs on their heads.

More pips = more profit.
Actually, you can have a negative pip count and still make a profit.
£10,000 starting pot. 5 consecutive trades with a running risk of 2%, all 1:1 risk/reward ratio.
2 trades with stop loss / take profit of 100 pips are losers. Total pips= -200, pot value £9,606
3 trades with stop loss / take profit of 50 pips are winners. Total pips -200+150 = -50, pot value £10,191.84

-50 pips but £191.84 profit.

Too many losing trades are hard to recover from.
Same £10,000 starting pot. Which is worse? 20 losers followed by 20 winners, or 20 winners followed by 20 losers. Answer before looking.

£10,000.00 £10,000.00 Start
£9,800.00 £10,200.00 1
£9,604.00 £10,404.00 2
£9,411.92 £10,612.08 3
£9,223.68 £10,824.32 4
£9,039.21 £11,040.81 5
£8,858.42 £11,261.62 6
£8,681.26 £11,486.86 7
£8,507.63 £11,716.59 8
£8,337.48 £11,950.93 9
£8,170.73 £12,189.94 10
£8,007.31 £12,433.74 11
£7,847.17 £12,682.42 12
£7,690.22 £12,936.07 13
£7,536.42 £13,194.79 14
£7,385.69 £13,458.68 15
£7,237.98 £13,727.86 16
£7,093.22 £14,002.41 17
£6,951.35 £14,282.46 18
£6,812.33 £14,568.11 19
£6,676.08 £14,859.47 20
£6,809.60 £14,562.28 1
£6,945.79 £14,271.04 2
£7,084.71 £13,985.62 3
£7,226.40 £13,705.91 4
£7,370.93 £13,431.79 5
£7,518.35 £13,163.15 6
£7,668.72 £12,899.89 7
£7,822.09 £12,641.89 8
£7,978.53 £12,389.05 9
£8,138.10 £12,141.27 10
£8,300.87 £11,898.45 11
£8,466.88 £11,660.48 12
£8,636.22 £11,427.27 13
£8,808.95 £11,198.72 14
£8,985.12 £10,974.75 15
£9,164.83 £10,755.25 16
£9,348.12 £10,540.15 17
£9,535.09 £10,329.35 18
£9,725.79 £10,122.76 19
£9,920.30 £9,920.30 20

There is no difference!

I have thought I understood the importance of money management before now but I am genuinely surprised by how critical it is.

As part of my back to basics I now have a written trading plan which tells me how and what I am allowed to trade and absolutely mandates that every trade has the same risk. This will be 2% for back and forward testing and then 1% for initial trading, rising to 2% when I'm comfortable.

Every trade placed will be allowed to run its course except for those still open on Friday evenings which will be closed before the markets shut for the weekend.

My back testing has proven that I will be a millionaire within the year! I'm not too excited as back testing always tells me that

In truth it will be the forward testing which will tell me if I can actually trade this method successfully. After that I either go back and reconsider or start live trading.

Watch this space...

Michael

That's the spirit Michael!!

Vincent

Hi Michael,
It surprises me that a combination of 20 winners and 20 losers results in a loss.
I assumed that 50% winners with a 1:1 R:R would be break-even. I never thought about working out the calculations.

Good luck


Keith

It surprised me too. That is just an excel spreadsheet with the value for losing trades being the cell above * 0.98. For winning trades it is * 1.02

Amazingly, if you do the same with alternating winners and losers the result is identical, regardless of whether the first one is the winner or the loser.

Are there any mathematicians out there who can explain why?

All the best

Michael

It's because a series of multiplications and/or divisions do not have to be done in any particular order.

2 x 3 x 4 = 24
2 x 4 x 3 = 24
3 x 4 x 2 = 24
3 x 2 x 4 = 24
4 x 2 x 3 = 24
4 x 3 x 2 = 24

Keith

Well I'm back after quite some time of not trading at all. I've joined the brokerage and have to say that what is happening in the trading room is great. Simple analysis with enough info to teach and encourage independence.

My first week demo trading closed with a profit of 7.5% despite some very poor decisions on my part.
Until trading with the MT4 mobile platform is available
I'm having to use code to place my trades, which means the stops aren't what they should be so that hasn't helped either so all in all I'm very happy.

I obviously wont be posting trade info here but ill post updates from time to time.

All the best

Week 2 on demo started with a bang. 5 losing trades and down 16%. Reviewing the charts later it was obvious that I had entered all of the trades to early. Almost all pairs had gapped over the weekend and I should have waited until the morning to decide on positions. The gap, along with the low volume in early trading meant that the signals I thought I saw were unreliable.

Of the five other trades I took three closed in profit, one at break-even and one lost. These along with a continuing trade from the previous week meant I recouped all of the losses and closed the week with a 1.5% gain.
Total gain so far about 9% in two weeks.

The fact that I could recoup such losses in a week astounds me. The trades I won could all have been handled better but still managed to net significant gains. Another week or two on demo and I'll be going live with a small account...

All the best

Michael

Not much to say about week 3. I decided that I wouldn't trade this week because the US budget debate was likely to cause some volatility and I knew I would find that difficult. I stuck to my plan, though it was tough at times to see so many potential pips flying past...
More demo trading this week all being well.

Michael

Still lots of volatility for week 4 so only two trades. One hit my target at about 2.5RR($233) and the other hit the stop loss. (-$51) The winner was at my maximum trade size of 5%, the loser was about 3% so my total gain in the four weeks since starting is 18%

This has got me thinking more about trade sizing. The demo account I have started a $2000 which is about what I have in my real account. The minimum trade size for the account is 0.1 lots and trades have to be in 0.1 lot increments. That's why the second trade was so much smaller. It was for 0.1 lots and to go to 0.2 lots would have exceeded my maximum.

Had the results been the other way round I would have had a losing trade of about $100 and a winner of $125. A net gain of $25 instead of the $182 I had. I don't think that it makes sense to have such a wide spread of risk across trades. That means that I have to consider increasing the balance, moving the account to somewhere that allows 0.01 lot trading or excluding trades at either end of my 'window'.

This is why it is so important to demo trade with an account size the same as you will be using for real. I would never have noticed this with an account size of $50,000!

All the best

Michael