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Money Management - The Holy Grail Of Trading
Money management determines how much to risk on each
individual trade. This is a vital element of any trading system -
risk too much and the chances of going bust are too high, risk
too little and the reward for trading is too low.
The main methods for calculating trade size are:
Fixed Fractional
The number of contracts to trade is determined by a fixed
percentage of current equity. As only whole futures contracts can
be trade this, effectively, means that the trader uses 1 contract
per $x of equity. For example 1 contract per $10,000.
Fixed fractional, however, requires unequal achievement at
different contract levels. For 1 contract every $10,000 to move
from 1 contract to 2 requires a profit of $10,000 from 1
contract. To move from 10 contracts to 11 still requires $10,000
profit but from 10 contracts. So for smaller account sizes it
will take a long time for the money management to actually kick
in and for larger account sizes the number of contracts traded
will jump wildly around.
Using fixed fractional the number of contracts traded would be
calculated as equity/x, where x=dollars per contract ($10,000 in
the above example).
Contracts - Equity Required $
1 - 10,000
2 - 20,000
3 - 30,000
4 - 40,000
5 - 50,000
6 - 60,000
Fixed Ratio
Fixed ratio adds a variable to the fixed fractional
method.
Fixed ratio adds delta to the calculation. The delta is a
factor which is required to move to the next contract level. The
lower the delta the more aggressive the money management is.
The formula is:
equity required to trade previous contract size + (number of
contracts x delta) = Next level.
Eg starting with a base of $10,000 for 1 contract and a delta
of $5,000:
Contracts - Equity Required $
1 - 10,000
2 - 15,000
3 - 25,000
4 - 40,000
5 - 60,000
6 - 85,000
Comparing the above table to that for fixed fractional it can
be seen that at the lower account levels less equity is required
whereas as the account grows the number of contracts traded
becomes less aggressive.
Tim Wreford runs Online Futures
Trading, a website that provides information and resources
for traders. Tim also provides a free
day trading system, the results of which are updated daily on
the site.
 MORE RESOURCES updated Mon. December / 11 / 2023
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