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