Trading With The Flow!!!

Starting this thread to first by collecting the posts made by Smart Trade in other thread.
We can continue the disucssion on MM here … so that its easily available for others.

regards,
Prasun

Post by Smart_trade

Hello friends,

Wanted to write down a few thoughts on Position Sizing and Money Management and tried to start a new thread but could not as the site did not allow (may be I am not doing it correctly.) Before these thoughts vanish and I become lazy about writing them down,I am putting it in the next post and request the Moderators to shift the same to wherever they deem fit so that I can delete this post.

Thanks,

Smart_trade

Post by Smart_trade

IMPORTANCE OF MONEY MANAGEMENT,POSITION SIZING AND AMOUNT RISKED ON EACH TRADE

When a trader starts his journey towards trading mastery,he takes a most predictable path as under :

1) This time I lost but Next time it will be a sure thing : A novice trader takes a few trades,makes money on some,looses on some but soon he will encounters " mother of all losses" or a huge cripling loss. He waits and waits in a loosing position,even adds to it and then books losses when they become intolerable. This has happened to all….let us be be honest. And then he justifies that loss with various thing like bad Govt policies,bad newsflow,operators and the games they play,and finally his luck and promises that next time he will make a "sure thing,never fail" trade and this cycle continues.

2) Search of some investment Guru,Newsletter etc : The next step is search of some guru,investment newsletter,tips etc .But the gurus which are "hot" go cold after some time and our trader goes on in such of new Gurus and this cycle continues.

3) I search of Indicators and "holy Grail"system :The next stage is various indicators,RSI,MACD,Stockastics,William's R ,various timeframes,charting softwares,Metastock,Amibroker,Tradestation etc and search continues for an indicator which "always work". But this stage results into one realising that there is no such thing as "Holy Grail". All one needs is to have a competent system with positive mathematical expectation,back test and forward test the system or method ,have a good money management and position sizing built into the method and trade that method with discipline and confidence. This is the "Key to the Kingdom".

And from here our novice traders starts his journey towars trading mastery in real sense.

I am giving a small mm game which every trader must play to convince him that mm is the king. Where you enter,where you exit,how many trades you loose,how many won and finally trading method is least important. About the game…. in the next post.

Best Wishes,

Smart_trade

Posted by Manoj

Dear ST Sir,
Thanks a lot for very informative writeup on Risk and MM.
A little doubt…..Sorry for asking silly question ……..With the above example, if our starting capital is Rs.1,00,000 and assuming we are risking 25% on each trade , if we get 4 initial consecutive losses, our whole capital will get wiped out and we will be out of the Game. Am I correct here in understanding or missed something.

Quote : "The final amount you will have is not dependent on the sequence of your winning/loosing trades,consecutuve looses,wins etc and final amount is over Rs 10,50,000/-"

I didn't understood about this part highlighted in bold.

Thanks and regards
Manoj

Post by Smart_trade

THE POSITION SIZING AND MM GAME

Make 40 small pieces of paper,on 20 write SUCCESS and on 20 write "FAIL" and fold them and pyt them in a glass bowl. Then ask a small child in the family to pick up each slip from the bowl and you read whether success or fail.

The sttarting capital is Rs 1,00,000/- and At each trade you will risk 25 % of the capital. If the trade is success,you make double the amount of money risked on a trade and if it is failure,you loose the amount risked on that trade. So for first trade your cum equity balance is Rs 1,00,000/- and the amount risked is 25000/- so if the slip says success,you make 25000*2 =50,000/- and your cum equity is 1,50,000/- now and on next trade you bet 25 % of 1,50,000/-. so go on like this till 40 trades are over.

The final amount you will have is not dependent on the sequence of your winning/loosing trades,consecutuve looses,wins etc and final amount is over Rs 10,50,000/- Dont believe me ? Try it out. I have spent 3 hrs on this game early in my career and tried coin toss,various sequence of alternate win/loss,10 losses and 10 wins in sequence etc…But the final wealth is same not enen a rupee more or rupee less.

What does this prove ? Have a competent system,backtest,have a good mm and trade with confidence. Our 60 min flow is a great method for this kind of wealth building…..Your sequence of losses and gains make no difference in ultimate results of building your wealth. Hope you enjoyed the game and learnt something from it…..

I am no way advocating risking 25% on every trade. This is just illustration because optimal f for this system is 25 %. But 25 % is way tooo high. Start with 1-2 % and put your profits to work for you….

Best Wishes,

Smart_trade

Posted by Beethoven

Great post ST,

Again whatever I have to say next may not be strictly relevant under this thread and can be shifted alongwith STs above 2 posts to a new thread if need be.

I am a new trader. I struggled from the vary basic. No one teaches trading which is a very strange thing in this profession. In all professions there are teachers and Gurus but here the teachers are of suspect quality who teach their own brand of trading which some times works and sometimes does not.

So essentially it becomes a self taught profession. Now all things about money management, psychology, etc are given in the books and can be applied without a guru but actual trading with a system requires some handholding otherwise the mistakes that we make can put many (and does so) out of business due to loss of capital.

So if you learn before you loose your capital then you have survived. Very few people can do that.

Now there are many systems — we were lucky that Saint took time out to teach us and hold our hands thru many unseen pitfall even though we knew all the rules by heart but actual trading was taught to us by him.

I am saying this because, I see, and am surprised that many traders who have been trading (do not know if successfully or not) for many years, are now following this method and are falling for the same mistakes that novices did.

What I have to say here is like any profession a teacher/guru is a must. Saint is unique in this way that he has taught us actual trading and that too free and on this own free will.

Once you know a system, work at it till it becomes a second nature. The trading will become automatic.

I had lots of problems following the system and did things not as per the rules - suffered time and again - but now 60 min flow is like second nature to me. I will continue this. I tried 30 min mini flow also in between but that interfered with my main system of 60 min. I have left that. So one system till I completely assimilate that into my pysche, style and MM.

I would also ask the newbies to try this out.

Read and keep track of all the systems Saint is teaching us — 30 min miniflow and ambush style but practice trading only one till you have nearly doubled your capital — that is the hall mark of your arrival as a trader on the scene.

A few thoughts.

Bee

Posted by Smart_trade

Dear Manoj,

The capital will not be zero after 4 consecutive losses an we are risking 25 % of the current equity in the account on each trade. So if first trade is a looser,you loose 25,000/- so now your equity balance is Rs 1,00,000- 25,000 = Rs 75,000/- so now on 2nd trade ,you bet 25% of 75,000/- so on and so forth.Take a paper and pencil…do the calculation…it is an eye opener…was atleast to me few years back.

So we have a system which is correct 50 % time and gives reward to risk ratio of 2:1…..so complete 40 trades ( 3 trades per month,that is the frequency of our 60 min trades) and after 40 trades your original capital of 1,00,000/- grows into a sum of over Rs 10,50,000/- ( actually it cones to 10,73,000/-)So making wealth by trading is not too difficult…we are making it difficult by not following correct method and mm principles….. Try it out…..

Best Wishes…

Smart_trade

Posted by manojkch

Thank You ST Sir! Now understood what you want to say. Really and excellent example of Risk and MM, Success ratio, Risk : Reward ratio. Your example gave me more confidence in my path to become a successful trader.
Thanks once again!

Best Wishes
Manoj

PS : Sir, Can you guide me how to do attachment ( Size:160 KB ) in this Site. I Have a very good article on " How to develop / Essential elements of a trading Plan" which I think will be very useful to Novice traders as well as professional traders.

Posted by Smart_trade

Manoj,
I am very bad in these technical matters. May be some of our moderators will be able to help you. Look forward to reading the article you mentioned.

Smart_trade

Posted by RajeshinFlow

Hello

A Money Management Game from Van Tharp.

Secrets of The Masters, Trading Simulation Game

Can download and play the first 3 levels for free.

Thanks

Posted by Kaiser

Great posts ST.
Thanks.

Hello *,

Since now the topic of MM has been started, I will just put down what I do? Could you all also please throw light on individual styles.

What I do is,

- Let us say I have a certain amount of money, e.g. 10L. I keep some money aside from that as a buffer money, e.g. 2L. (just e.g. 20% of equity)
- Now what money left 8L is for the current month trading.
- In 60 min flow, we do not know/predict the trade will be winner or looser.We simply trade the flow. We do not have fixed target etc.
- There has to be winners, otherwise no MM will help.
- Since I decide to track the money EOM (End of Month) basis, I do not reduce the capital when I get loss making trade. meaning if trade goes in loss for 10K, I still take risk of 10K for next trade. I think in mind that in a month, there will be a series of win and loss and it should have equal justice.

- At the end of the month, if net is loss e.g. 30K then the total money left is 10L - 30k = 9,70K.
- For coming month I will use 7,84L for the trading.

Kaiser.

PS : Sir, Can you guide me how to do attachment ( Size:160 KB ) in this Site. I Have a very good article on " How to develop / Essential elements of a trading Plan" which I think will be very useful to Novice traders as well as professional traders.

Manoj,

Many thanks, for sharing the article.
I would suggest you upload the file at <www.4shared.com>, and paste the link here.

Regards,
Prasun

One of the Gem from Saint Sir from TJ

I had seen that,and you are not wrong in your Math.

Presuming we are having the same capital,and 1% is your risk….First Buy is at 4062.We did our Math and could take on about 82 shares,so we buy 1 lot NF.Add 1 more at 4024…….your risk is still 1% of your capital.

Presuming you took on slightly more risk yesterday—you took on 2 lots at 4062.If you add another 2 lots at 4024,you are assuming 2% risk to your capital.If you add 1 lot at 4024,still you are at 1.5% risk.Now you will have to assess the Risk percentage acceptable to you………some might take on 2%,others 1.5%,others 1%………

Case scenario 1:Mr A has a range of percentage,not a point.Meaning he takes on Risk of 1% and would like to keep it thereabouts,but even if on an add it rises to 1.5%,he would go for it.That is,initial positions are 1%,adds are equal to less only,he would like things to remain at 1%,but understands that circumstances may exist(like a gap),that may push the percentage out of 1%.He is prepared to take up to 1.5% but that's about it……..anything more is sacrilege…….My strategy is like Mr A.

Case scenario 2:Mr B has a risk percentage of 1%,he buys it at 4062 using his 1%………..the question is:How does he then add at 4024?

Both Mr A and Mr B are faced with a dilemma at 4024…………Now both A and B are going to find it difficult.A buys 2 lots at 4062,B buys 2 lots at 4062…….4024 ADD 1 opportunity comes along…..A would like to buy 2 lots,which would send his Risk up to 2%.He doesn't mind up to 1.5%,but not 2%……B has the same dilemma but he is not happy with 1 lot either as 1.5% is not in line with his Plan either.

So,B has to give up on both lots opportunity,and A has to give up one lot……………..Here's what I did today:A buy at 4024 was juicy.But that would send my Risk up to 2%,bought 2 lots nevertheless……..with a close watch on pivots.Risk 2%……..by the latter part of the day,we have managed to bring our stops to 3980.Means our risk is back down to 1.2%.

If that had not happened,would have removed 1 lot at the end of the day,been happy with a good DayTrade,and holding 1.5% risk overnight.

Now,for you,you are willing to take on only 1% ………you have 2 choices.Either do what I did and if the move did not take place,exit both lots and you are back at 1% risk……….If the move does take place,you are raising stops and all is well……………Other way out is to not add there.

At the end of the day,you should take on only as much risk that can be handled by you…………..

All the best!

Saint

Hello
I have a very basic query on MM.
Suppose my trading cap is 10L. I take a trade on nifty using 2% risk, doing the maths based on SL it is calulated that my initial posn will be 2 LOTS.
To trade in 2 Lots suppose the margin amount that is blocked is 35K.
Now another trade comes into my way and I wanna take it. So now when I do my maths what shall be my trading cap does it remains the same 10L or is it now 10L-35K.

KomaL

Hello
I have a very basic query on MM.
Suppose my trading cap is 10L. I take a trade on nifty using 2% risk, doing the maths based on SL it is calulated that my initial posn will be 2 LOTS.
To trade in 2 Lots suppose the margin amount that is blocked is 35K.
Now another trade comes into my way and I wanna take it. So now when I do my maths what shall be my trading cap does it remains the same 10L or is it now 10L-35K.

KomaL

MM percentage taken on total available cap. So even if trading 3 scrips and 1% risk then each script's risk is 10,000 Each.

Regards,
MJ-

Hello
I have a very basic query on MM.
Suppose my trading cap is 10L. I take a trade on nifty using 2% risk, doing the maths based on SL it is calulated that my initial posn will be 2 LOTS.
To trade in 2 Lots suppose the margin amount that is blocked is 35K.
Now another trade comes into my way and I wanna take it. So now when I do my maths what shall be my trading cap does it remains the same 10L or is it now 10L-35K.

KomaL

Hello Komal

For MM you need to work with 2 percentages, first is Max risk per trade, which in above case you are assuming to be 2%, another limit in % terms will be maximum risk on total position, lets say you trade 5 scrips/tickers including nifty, then you will have a limit on total exposure (thus risk will be 10%).

Now if this 10% sounds excessive to you then limit the number of scrips or reduce the risk per scrip, so maybe 1-1.5 with 5 scrips would be ideal.

Over and above this calculation you also need to consider some special situations like gaps against your positions. Overall without making it complicated we need to ensure that we will stay in the game long enough so that the law of averages works in our favor.

SPAN Margin should be least of your worries, the game is setup in such a way that the average joe/jane will lose. Don't focus on margin, what counts is total capital available for trading and taking proportional risk.

Hope it helps

Thanks
Rajesh

Excellent posts in this thread.

Thanks everyone.
Avinash

Hello
I have a very basic query on MM.
Suppose my trading cap is 10L. I take a trade on nifty using 2% risk, doing the maths based on SL it is calulated that my initial posn will be 2 LOTS.
To trade in 2 Lots suppose the margin amount that is blocked is 35K.
Now another trade comes into my way and I wanna take it. So now when I do my maths what shall be my trading cap does it remains the same 10L or is it now 10L-35K.

KomaL

Your capital is still 10 L ,Komal,but now you already have 2 lots position entered at a particular point.You have to decide the total risk you are willing to take on all positions put togather .If it is 2% and your stoploss in original nifty position is not moved in your favour so far,then you cannot take the fresh trade…
Many traders have two limits 1) Max amount that can be risked an a trade 2) Max amount that can be risked taking all open positions taken togather. This is necessary as in case of sudden reversal and all trades hitting the stoplosses,one does not go belly down .

Best Wishes,

Smart_trade

thanks Rajesh and ST.

The loss i got today was Mainly due to wrong money management.adding to loss making position(averaging).

IN simple example can any one say how much %risk can be taken for a 1 nifty lot,capital required etc.
pls help needed.

The loss i got today was Mainly due to wrong money management.adding to loss making position(averaging).

IN simple example can any one say how much %risk can be taken for a 1 nifty lot,capital required etc.
pls help needed.

1 lot NF with 100pts risk = Rs 5,000
1% risk
Capital required = 5Lakhs.

MJ-

The loss i got today was Mainly due to wrong money management.adding to loss making position(averaging).

IN simple example can any one say how much %risk can be taken for a 1 nifty lot,capital required etc.
pls help needed.

Srini,

I am pitching in, hope others ST doesn't mind.

Lets take an example, say of 60 min trade (dummy) :

say we are to reverse to short now, our entry is say at 2900, and stop loss at 2975 (including filters everything).

entry = 2900
SL = 2975

Risk = 2975 - 2900 = 75 points.

Now, lets say we have 10L, and we want to risk 2% per trade.
So, 2% of that is 20,000/-

Now, with a risk of 75 points how many lots should we buy

20000/75 = 266.66 shares, or 5 lots.

This is a simple way to calculate before entry.. you can calculate it in the reverse order also.

Regards,
Prasun

Thanks Prasun & MJ

U both have cleared my doubts.So without 2.5 laks we should not even trade in mininifty.
So as per Prasun ex:
With 10L we take 5 lots of nifty.so we use alost 1L for it.so what can we do with that remaining 9L.
can we take 5-10% risk instead of 2% ,so we can trade more lots.

Thanks Prasun & MJ

U both have cleared my doubts.So without 2.5 laks we should not even trade in mininifty.
So as per Prasun ex:
With 10L we take 5 lots of nifty.so we use alost 1L for it.so what can we do with that remaining 9L.
can we take 5-10% risk instead of 2% ,so we can trade more lots.

Srini,

The basic idea of MM is to not to deplete your capital if you are having a string of losses.
Suppose you get a loss of continuous 5 trades, with 5% equity loss in each…. you will be down 30% from your actual Sum.

But what about the adds, Say when trades move in your favour.. and your risk points after moving your SL is 0, then you can take a add of 5 lots again if your SL is that far.

So after a full trades with about 3 adds etc… you will have used up lot more that 1L as margin.

Another thing is, trade another counter for 2% risk… say RIL, LT , ABAN .. anything.
That way you can have 2% risk per trade and overall may be 10% risk and you will use your capital to full if you go with all the adds…:)

Regards,
Prasun

Thanks Prasun & MJ

U both have cleared my doubts.So without 2.5 laks we should not even trade in mininifty.
So as per Prasun ex:
With 10L we take 5 lots of nifty.so we use alost 1L for it.so what can we do with that remaining 9L.
can we take 5-10% risk instead of 2% ,so we can trade more lots.

mmm..coming across this question very often now.
Forget about usage of money, how much capital is blocked etc…

In my humble Opinion Srini

With 10L, and 1% risk…you can risk no more than 10,000 per trade….thats the end of it.
IF trading 3 scrips, then thats 30k. Close case. Dont think about, margin, or remian 8L or 9 L…

We calculate on total cap.

MJ-

Guys I think the % risk and all is very clear to everyone but I think everyone is ignoring an important criteria about Position Co- relation.

As I read in one of the above posts, that if you have 2% risk already been taken in Nifty you can diversify by putting another 2% in ABAN, LT, etc. Sorry to say it guys but this actually is total Money -mismanagement as Nifty and other stocks tend to move mostly in same direction. Now suppose, you went short on Nifty with 2% capital and other 8% is used to go short in say ABAN, LT, HDIL and JP, what if market starts moving up and takes stops on all the stocks, where are you left with 10% loss to your portfolio in a single day, think of 2 -3 consecutive losses which are very common and you may be down nearly 30%, thats totally unacceptable.

First of all, frankly 2% is too much for a 60 min. flow trade, in my view 1% is adequate, if you dont ave adequate capital go for Minifty and slowly graduate to Nifty.

Secondly, if you need to Diversify, go to other markets like Currencies, Gold, Copper, Crude, etc. these are all loosely related and positioning yourself here gives you actual Diversification.

And last but not the least you need to have a Monthly Risk %, i.e. if you loose say around 10% in any given month, you should immediately stop trading. Now think of it, if you take 2% hit on every trade in 60 min. method how many months you will have where 10% Monthly loss will be hit, I suppose many. So dont stretch beyond 1%.

Money Management is all that there is to loosing and winning in markets, its better to chase the best Money Management systems rather than Entry/ Exit methods, that will make sure we emerge a winner

Prabhjeet,

Thanks, for clarifying further… great post..:)

Regards,
Prasun

Hello

A new innovation may help traders to be more diciplined in proper position sizing and taking the Stop Loss everytime it is triggered.

The details of the product not yet realized, but we can have a sneek peek at it.
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does anyone have an excel sheet or any tracking sheet which allows you to trade the 60min flow with proper money management technique and also at the same time keep a track of all the adds,modified stops and at the same time give a proper P/L including the brokerage at the end of the trade?

some one please reply :)

Dear all,
http://www.4shared.com/dir/14063063/ea35986e/sharing.html . This is the link for "Trading Plan Template". A very good article on essential element of trading plan / how to develop a trading plan.

Hope You all find it useful

Thanks and Regards
manoj

Hope our newer friends have gone through this pdf file that Manoj had posted in the previous post.

Saint

Thanks for sharing trading plan template.

Regards