Forex Money Management

Question 1

What is Money Management?

Answer 1

A strategy of how you reinvest the money that is earned.

Question 2

Three Money Management Strategies?

Answer 2

Linear, Larry Williams, Fixed Ratio

Question 3

Who is Larry Williams?

Answer 3

One of the founders of modern money management. 1987 World Cup Champion of Futures Trading (12 months turned $10,000 to $1.1 million).

Question 4

Core concept of Larry William money management system?

Answer 4

Get exponential growth by trading based on total amount earned with profit.

Question 5

Core concept of Linear money management system?

Answer 5

Risk fixed amount of money based on initial fund amount.

Question 6

Larry William Formula?

Answer 6

Vol = Risk x Equity / Lmax Vol: Volume in contracts Risk: Tolerable risk (%) Equity - Free funds on account Lmax - Max loss per 1 contract historically (most negative trade)

Question 7

Larry Williams Method Trap?

Answer 7

The amount of risk is screwed towards the loss. The effective stoploss is greater than the typical stoploss for a linear system. Breakeven to make money is higher than a linear method.

Question 8

Larry Williams Method advantages and disadvantages?

Answer 8

Advantages - Exponential Growth - Simple Formula - Good For Low Balance Accounts with Possibility of Large Growth Disadvantages - High Risk Strategy (Risk Distortion) - Simultaneous Positions - Consecutive Losses (Down drag)

Question 9

Who is Ryan Jones?

Answer 9

Created Fixed Ratio Money Management system and Focused on Money Management above the Trading strategy.

Question 10

What is Fixed Ratio Money Management?

Answer 10

Money management system based on a concept known as “delta”. The delta is the amount of profit that needs to achieved before increasing one’s position size.

Question 11

How does delta effect risk in the Fixed Ratio Money Management System?

Answer 11

If the delta is lower the trader is more aggressive, if the delta is higher the trader is more conservative.

Question 12

Why is the Fixed Ratio Method safer than the Larry William Method?

Answer 12

The ratio between takeprofit gains and stoploss losses decreases as the amount in the account increases. (Within each delta the ratio is the same)

Question 13

Fixed Ratio advantages and disadvantages?

Answer 13

Advantages - Exponential Growth - Much Safer than LW Method - Table of risk removes any complexity Disadvantages - Initial effective SL/TP ratio can be high - No single formula, must use table

Question 14

Fixed Ratio advantages and disadvantages?

Answer 14

Advantages - Exponential Growth - Much Safer than LW Method - Table of risk removes any complexity Disadvantages - Initial effective SL/TP ratio can be high - No single formula, must use table

Question 15

Hypothetical scenario: your account balance is $20,000 and you have just started a new step within the Fixed Ratio method. Throughout this step you are going to be trading with 4 lots, the Delta is set at $500. At what account balance are you going to proceed to the next step?

Answer 15

$22,000 Next Step ($20,000 + 4 x $500)

Question 16

When does the Fixed Ratio method recommend you to move on to the next step, i.e. increase your trading volume?

Answer 16

When each lot you are currently using has earned a delta on top of the current step’s starting balance.

Question 17

Who invented the Fixed Ratio Money Management system?

Answer 17

Ryan Jones

Question 18

What is Kelly’s Formula?

Answer 18

K = [PxB - (1-P)] / B K - % to risk to get optimal solution P - odds of winning B - payout on the bet (ratio between winning and losing)

Question 19

Four regions of risk associated with the Kelly chart?

Answer 19

• Conservative (0 to 1/2K) - Aggressive (1/2K to K) - Over-Aggressive (K to 2K) - Insane (> 2K)

Question 20

Benefits of Half-Kelly over Full Kelly?

Answer 20

• 50% Reduction in Risk - > 50% Reduction in Volatility - Only 25% reduction in Return - Increased Tolerance Errors

Question 21

Main assumption of Kelly Criterion?

Answer 21

Assumes that return is over many trades.