Money & Risk Management

[Stan]

Hello,

Maybe the subject would be interested for advanced Forex traders also, but I would like to start the thread here,
so that the absolute beginers ( I hope, there is a lot of them!) could take a profit for themself too.

I have noticed, surfing through the Internet Websites about Forex, that there appeare, from time to time, the following
magic terms: Money Management and Risk Management.
Maybe it is a good idea to provoke a discussion or a speak one's mind what are as well Money Management and Risk Management?
Does the Wikipedia speaks all the truth about this matter?
http://en.wikipedia.org/wiki/Money_management
http://en.wikipedia.org/wiki/Trading...isk-management
What articles, books or Website links would you recommend about this matter?
What manners of money and risk management are you using, if you are trading on the Forex market?
I have a hunch that they are very important things and a big part of a profitable forex trading strategy.
I am not sure, but maybe there should be two separate threads, one for Money Management and the second for Risk Management. And there I am sure, Admin will take the only correct decision.

[Jim]

Hi Stan,

I have noticed, surfing through the Internet Websites about Forex, that there appeare, from time to time, the following
magic terms: Money Management and Risk Management.
Maybe it is a good idea to provoke a discussion or a speak one's mind what are as well Money Management and Risk Management?
What articles, books or Website links would you recommend about this matter?
What manners of money and risk management are you using, if you are trading on the Forex market?
I have a hunch that they are very important things and a big part of a profitable forex trading strategy.

Your hunch is correct! Risk management and money management are vital parts of a profitable forex trading business. Different people mean different things by the terms, and Wikipedia certainly doesn't speak the whole truth about these matters.

For me money management, sometimes called position sizing, is but one part of overall risk management. As I mentioned over on the "robots" thread, you need to work out how to to get a handle on the worst that can happen to your trading account, and how to survive with enough left in your bank to eventually work your way back into profit.

About the worst that can happen is that a broker can disappear taking all your cash with them. Risk management therefore starts with doing your due diligence before sending any of your hard earned cash to any broker, and also spreading your risk across more than one broker. Obviously you eventually have to start somewhere, but whatever you do never send your entire trading bank to just one broker. Always keep some cash in reserve too, just in case.

For a light hearted introduction to the basic ideas of money management you could take a look at the Senior Year section of the BabyPips course. Ignore all the advertisements (apart from maybe a bit of the free stuff), and as always take everything with the proverbial pinch of salt. Note that in that first article BabyPips tell you that "this section is one of the most important sections you will ever read about trading." Whilst there is some truth in that why do they, along with just about everyone else, leave it almost to the very end of their course to tell you that?

For some more advanced ideas, which are nonetheless still free of charge, you could do a lot worse than to take a look at an article written by trading legend Ed Seykota, which you can download from the Galt Capital web site.

Once you've got to grips with that lot you'll want to read a weighty tome on the subject several times over. We recommend Fred Gehm's "Quantitative Trading and Money Management". Another very useful book about many aspects of trading, which also includes the original Turtle trading rules, is Curtis Faith's "Way of the Turtle". If you like you could even purchase those books from one of our online bookstores, along with a few more of our recommended textbooks! Alternatively if you don't mind scouring the internet for a bit you might be able to find cheaper sources.

Having done that you'll eventually want to include experimenting with money management methods and settings as part of your standard system backtesting procedures. Since you're the first person to ask this vital question, our example "robots" don't currently include any "intelligent" money management methods. Let me know whether you currently prefer to use MT4 or MT5 for testing, and I'll knock something up for you.

[Stan]

Hi Jim,
I appreciate your extensive answer about MM&RM very much. It helps me to start understand and learn
about the exciting Forex domain.

As I understand, MM&RM are more or less sophisticated methods, that can alternatively or not preserve a trader from
losing his money at once or in a dangerouse, not well-thought-out trading process that can last a longer time.
I see, there is a lot of items to read and test, and I am happy to know, which items to read on the start.

Thank you Jim for the included in your post information and explanations.
I hope, these will be also valuable and helpful for many other, like me Forex Beginners, reading the Trading-Gurus Forum.

Cheers,
Stan

[Jim]

Hi Stan,

My pleasure. You can never learn too much about money management.

Here's an interesting new article from the MetaTrader 5 contest for example. The conclusion is that the leaders are using much too risky MM!

You still haven't told me whether you're into MT4 or MT5 at the moment though!

[Stan]

Hi Jim,

sorry for my delay.

Regarding my MetaTrader preferences, I would try MT5.
Please do not ask me why. I am an Absolute Beginner and I do not know the all subtle nuances about and differences between MT4 and MT5.
I choosing MT5 because it is a new version, maybe it has more possibilities in comparison to MT4.
It utilises C++ like language besides and I like the object oriented approach to the programming. (Although I am not a professional in this matter).
On the other hand, I know, MT5 is in beta stage and probably has many bugs.
I would not preclude using MT4 simultaneously, if it would be needed with a good reason.

I like to know what I am doing, so to be familiarize with MT5 C++ like language is for me crucial.
I started to read C# for Sharp Kids a couple weeks ago, but I think, it would be better to read the MT5 language documentation instead.
There are certainly some differences.

I would very appreciate any advices about using MT5/MT4 platform and their languages in the future.