Fixed Ratio is ideal
Hi pradyk...I'm afraid you cant really 'templatize' a money management system. Even if you manage to find one, it would work best only for the template creator...and not for you.
I'd suggest you create your own template based on your risk and reward appetite. This book by Rayn Jones will be a good starting point for you.
Here are some guidelines that I follow (it may not be the best but it works for me).
- Do not take any trade where risk:reward ratio is less than 1.1
- While trading counter trend or within trading ranges RR ratio of 1.1 is OK. Also I will keep tighter stop losses.
e.g. if risk is 10 points, then take trades where probable target is at least 11 points.
- For with trend trades, I try look for targets at least twice the risk taken with wide stop losses. I try to achieve higher target by trailing stop losses.
- Book full profit on counter trend and trading ranges trades once target is achieved. For with trend trades, I keep trailing stop losses.
- Though it is usually suggested to risk equal amount on the all the trades, I typically risk half the amount on counter trend and trading range trades than I would usually on with trend trades.
- Not to risk more than 2% of trading account on any trade.
e.g If the trading account is 1 lac and with 2% risk, one can risk 2000 on with trend trades while only 1000 is allowed in counter trend and trading range trades.
Again these may not be the best and complete set of rules. Would refer to authoritative sources for complete guidance. Most of the good books on trading do have a section on money management. My personal favorite authors on this topic are Charles LeBeau, Dr. Van Tharp, Dr Elder Alexander, Steve Nison (in his video courses).
Karthik, Thanks for the answer, Yes i’ve read that book a while ago, I understand its different for every trader but thats where the template is useful where in they can change the parameters according to their trading style
I agree pradyk. But my worry is that few assumptions could be hard coded making it less flexible. Nothing like developing your own. Finally the call, of course is yours
Cheers Karthik . Yes if its hard coded its pretty difficult to use. Im just trying to understand what kind of MM techniques the traders using at least these templates help me to develop my own.
Thanks Ajay for sharing your rules, They sound pretty interesting.
I would like to learn more on how its profitable with Just 1.1 RR , if i understand correctly you have higher average RR am i right?
Though we call it risk reward ratio, it is actually 1.1 reward for 1 risk. As I mentioned in e.g. say suppose my SL is 10 points (i.e. risk of 10 points), I would not take the trade if reward(target) is not at least 11 points.
This I typically apply for counter trend and trading range trades where it is not good idea to keep high expectation. Also since these trades are more riskier then with trend trades, it is good idea to book profits early rather then let greed over take you and then the trade may turn around. Though these are riskier trades, we do keep getting some very good trades (especially since it is known that markets are in trading range for over 50% of the time) and I would not like to miss them.
Finally the strategy for these trades has to have a win to loss ratio of at least 60%.
So in 100 trades while there could be loss of 40000 (40 trades with 1000 loss), there would be profit of 66000 (60 trades with 1100 profit) resulting 26000 net profit minus brokerage and commissions.
The reason I want slightly higher reward is to take care of brokerage and commissions - though with Zerodha this factor has become negligible
Cool Ajay do you trade the same quantity or change?
I keep my risk amount per trade same which requires adjusting position size. e.g. there are two counter trend trades, one where risk is 10 points and other where risk is 20 points. I would buy 100 in 1st case (1000/10) while in other I will buy only 50 (1000/20) thus risking 1000 in both cases.
Thats pretty smart Ajay
Do remember I am also a trader just like you. These are just guidelines to get one started.