I received many comments, questions and emails about the management of money these days with the market becomes very volatile. This article will show you the most important math, you must learn to have good money management in learning to act on this market.
Risk of Ruin
Risk of ruin risk of ruin is a statistical model that tells you the chances you will lose all of your account based on your win / loss% and risk you put on trade. This is essential to know, because you could say that 10% of your capital per trade, and say have a 2:1 ratio of reward to risk of filtration or A: R, and has an accuracy of say 35% you a chance of 60.8%, you lose all your money.
Is this a track you want to know in advance? Hopefully. Let& talk first about its history and how we can customize for trade.
Math Ruin risk tables were first applied to games of chance and rightly so. In games, blackjack is if you win a hand with the dealer breaks, you get a gain of 1-1, so if you put $ 100 in hand, you win $ 100. It helps to know in advance so you can see if your benefit (% chance you will win over time) is enough to make money or lose money.
But this is the trickiest part. In trade, we rarely know exactly how much we have to do with trade. We have a border and a stop (hopefully) from the outset, we are aware of our risks and potential benefits. But here is the forerunner and issues to consider;
1) How many times have you had the chance to win a closed shop before hitting full profit?
2) Do you have a trading system in which profit is exactly the same (a fixed number of points), and then you know what exactly a prize pool payout will be if you hit?
3) Do you know how accurate you are going to be based on the exchange system to use? In other words, it is modeled in order to predict the overall accuracy of a few% per month?
If the answer to question 1 is about 25% or more, then one must take into account when calculating our grave risk of ruin.
If the answer to question 2 is no, then you must also take account of this grave to calculate your risk of ruin.
If the answer to question 3 is no, then also be taken into account when calculating a serious risk of ruin.
Lets explore each question, then, mathematics, and then see what a stable level of risk in order not to destroy your account.
Closing a Winning Trade Before Hitting Full Target
Lets be honest for those of you that are still learning how to trade this market consistently – how many times have you closed a winning trade before hitting the full target? The answer is likely many as I talk to traders all the time and hear this from them time and time again. If you were perfect in your discipline, never made an error in trading and risk management, then I would say go ahead and risk 10% of your capital every time if you could always trade with 40% accuracy and had a reward to risk ratio of 2:1.If you did this, you would have only a 14.3% chance of losing all your capital and likely have a winning account.
However, if you cut your profit targets for whatever reason, say 50% of the time and you cut them in half, your risk of ruin goes up to about 60% – meaning you have a 60% chance of losing all your capital. This changes the game completely and puts the mathematics heavily against you having a long trading career.
In fact, every time you shorten your original profit target, you stack the numbers against you and its more likely you are shortening your profit targets than increasing them.
The result is that you must reduce the amount of risk per trade to keep the same board or luck, stay in a trading system where the profit target is set each time (50pips example).
How many of you use your only way to trade the markets? The answer is probably less than 10% that most of you probably do not use a system to trade in the market, but several. Even if you use a system, most likely not have a fixed target.
The reason for having a fixed target gives an edge (mathematically) is that once the relationship is stable precision, you can easily calculate the risk of ruin because of their risk and reward is fixed from the beginning. This makes the calculations very clean.
The result is that you must reduce the amount of risk per trade to keep the same board or lucky, to remain in game.However have a fixed target is not always desirable. Sometimes, the market for a runner so it helps to take advantage of these great movements when they come. They increase the alpha (the rate of return of an instrument beyond what would be predicted by an equilibrium model) in their statements and help soften the loss period. For a full article on the Alpha, click here, but basically means that if the system is on average 50% accuracy, the R: R indices are 2:1, you must earn $ 1,000 to each winner and 500 $ for the loss. After 10 operations that have bet $ 2500. However, if you have an alpha of 5%, will be an additional $ 125, which over time adds up.
Staying a long time to go shopping for runners, but accuracy remains the same, we can calculate the winner, what do you usually get two so its critical to keep the stores operating or not you leave a message based on a fixed number. Some systems work best at a fixed profit target, but there are many that work much better when they're in runners.
Regardless, if the system is not fixed profit in points, so you might want to reduce the risk of % on the math to keep more in your favor.
How accurate are you going to be?
Unless you have solid front and back testing on your system, you will not know the answer to this question. In addition, changing markets and your level of accuracy is likely to change with them. Do you even know your current ratio accuracy as it is for all your trades? Per couple? Per system? If you have not, so its very likely that you& have the numbers stacked against you and your chance of losing all your capital is more likely that you assume.
Therefore, what it means to be on the bright side, you want a small amount of% of equity to risk per trade. This becomes even more critical in the early stages of your business, you're likely to make more mistakes, have a lower participation of equity and take a profit before hitting your best target.
Risk of Ruin
Risk of ruin risk of ruin is a statistical model that tells you the chances you will lose all of your account based on your win / loss% and risk you put on trade. This is essential to know, because you could say that 10% of your capital per trade, and say have a 2:1 ratio of reward to risk of filtration or A: R, and has an accuracy of say 35% you a chance of 60.8%, you lose all your money.
Is this a track you want to know in advance? Hopefully. Let& talk first about its history and how we can customize for trade.
Math Ruin risk tables were first applied to games of chance and rightly so. In games, blackjack is if you win a hand with the dealer breaks, you get a gain of 1-1, so if you put $ 100 in hand, you win $ 100. It helps to know in advance so you can see if your benefit (% chance you will win over time) is enough to make money or lose money.
But this is the trickiest part. In trade, we rarely know exactly how much we have to do with trade. We have a border and a stop (hopefully) from the outset, we are aware of our risks and potential benefits. But here is the forerunner and issues to consider;
1) How many times have you had the chance to win a closed shop before hitting full profit?
2) Do you have a trading system in which profit is exactly the same (a fixed number of points), and then you know what exactly a prize pool payout will be if you hit?
3) Do you know how accurate you are going to be based on the exchange system to use? In other words, it is modeled in order to predict the overall accuracy of a few% per month?
If the answer to question 1 is about 25% or more, then one must take into account when calculating our grave risk of ruin.
If the answer to question 2 is no, then you must also take account of this grave to calculate your risk of ruin.
If the answer to question 3 is no, then also be taken into account when calculating a serious risk of ruin.
Lets explore each question, then, mathematics, and then see what a stable level of risk in order not to destroy your account.
Closing a Winning Trade Before Hitting Full Target
Lets be honest for those of you that are still learning how to trade this market consistently – how many times have you closed a winning trade before hitting the full target? The answer is likely many as I talk to traders all the time and hear this from them time and time again. If you were perfect in your discipline, never made an error in trading and risk management, then I would say go ahead and risk 10% of your capital every time if you could always trade with 40% accuracy and had a reward to risk ratio of 2:1.If you did this, you would have only a 14.3% chance of losing all your capital and likely have a winning account.
However, if you cut your profit targets for whatever reason, say 50% of the time and you cut them in half, your risk of ruin goes up to about 60% – meaning you have a 60% chance of losing all your capital. This changes the game completely and puts the mathematics heavily against you having a long trading career.
In fact, every time you shorten your original profit target, you stack the numbers against you and its more likely you are shortening your profit targets than increasing them.
The result is that you must reduce the amount of risk per trade to keep the same board or luck, stay in a trading system where the profit target is set each time (50pips example).
How many of you use your only way to trade the markets? The answer is probably less than 10% that most of you probably do not use a system to trade in the market, but several. Even if you use a system, most likely not have a fixed target.
The reason for having a fixed target gives an edge (mathematically) is that once the relationship is stable precision, you can easily calculate the risk of ruin because of their risk and reward is fixed from the beginning. This makes the calculations very clean.
The result is that you must reduce the amount of risk per trade to keep the same board or lucky, to remain in game.However have a fixed target is not always desirable. Sometimes, the market for a runner so it helps to take advantage of these great movements when they come. They increase the alpha (the rate of return of an instrument beyond what would be predicted by an equilibrium model) in their statements and help soften the loss period. For a full article on the Alpha, click here, but basically means that if the system is on average 50% accuracy, the R: R indices are 2:1, you must earn $ 1,000 to each winner and 500 $ for the loss. After 10 operations that have bet $ 2500. However, if you have an alpha of 5%, will be an additional $ 125, which over time adds up.
Staying a long time to go shopping for runners, but accuracy remains the same, we can calculate the winner, what do you usually get two so its critical to keep the stores operating or not you leave a message based on a fixed number. Some systems work best at a fixed profit target, but there are many that work much better when they're in runners.
Regardless, if the system is not fixed profit in points, so you might want to reduce the risk of % on the math to keep more in your favor.
How accurate are you going to be?
Unless you have solid front and back testing on your system, you will not know the answer to this question. In addition, changing markets and your level of accuracy is likely to change with them. Do you even know your current ratio accuracy as it is for all your trades? Per couple? Per system? If you have not, so its very likely that you& have the numbers stacked against you and your chance of losing all your capital is more likely that you assume.
Therefore, what it means to be on the bright side, you want a small amount of% of equity to risk per trade. This becomes even more critical in the early stages of your business, you're likely to make more mistakes, have a lower participation of equity and take a profit before hitting your best target.
