Risk and Moneymanagement

The most important thing in trading is money management. No ifs and buts! Here I show a  simple but very useful approach to risk and money management. I have put countless hours into RMM and have constantly expanded and refined it so that other parameters are also included in the calculation.


The possible profit is initially irrelevant and not decisive. We want to survive in the market over the long term and stay afloat. A good MM is the guarantee to stay on the market, even if things don't work out for a long time. Because at some point the market will run against you.


No matter which method you use to trade, without a conservative MM you will not be profitable in the long term. How and what risk you take depends of course on the respective strategy and method. There is no general answer to this.


My strategies are all programmed and backtested. This makes the calculation of the MM easier. The backtest provides information on how the strategy has performed in the past and how high the max. Draw Down was. Even if you can't transfer this 100% to live trading, you have to expect at least a similar decline at some point.


EXAMPLE: Strategy 1 has a max drawdown of $10000. The margin I need to deposit to buy 1 contract is $5000. Overnight margin also needs to be considered in swing strategies. Now, to trade this strategy, I should reserve at least the sum of max DD + Margin (10000 + 5000 = $15000)! If I only have $10,000 available, I can't trade the strategy! I also want to trade when I'm in advanced DD. If the DD rose above $5000 I would be unable to trade!


Margin of some stocks: Corn (C): $2363, E-Mini S&P500 (ES): $5000, Gold (GC): $11475, Dax Future (FDAX): €11570


With several systems, you calculate the minimum amount that you should reserve for each strategy and then add everything up.


Of course, a MM also includes a profitable strategy! If the strategy doesn't make any money in live trading, then even the best MM won't help me.