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MONEY MANAGEMENT

What is Money Management?

Money Management is, basically, to determine the amount to risk in the following operation, with the objective of maximaze our results through the time.
To understand it, let´s assume a coin toss. Probabilites are 50%. If in this game we bet all our capital, the probabilities of being ruined in a couple of bets would be very high.
Money Management consists in to determine the amount to risk to try to avoid the risk ruin and maximize our returns.

In coin´s game we know the profits, the losses and the probabilities in advance. However, this doesn´t happen in stock and financial markets.
In stock markets we do not know beforehand how much are we going to earn or loss. We don´t even know it despite we put a Stop Loss order due to the gaps that can happen. So, the only thing we can know beforehand is the number of contracts (or shares) we buy/sell.

Systems shown in this website have Positive Expectation, which means that, so far, are winner systems. Let´s see how differents Money Management strategies would affect the Equity.

Money Management Strategies

There are many Money Management Strategies; we´ll see a few of them.

- Optimal f (Ralph Vince´s): it decides what amount to risk in the next operation depending on the maximum loss and the results of previous operations.

-Position Increment per gained lot (much more easy to calculate than Optimal f, but no worse at all as we can see in the comparative chart ): ie. increase our number of contracts when our equity increases an pre-fixed amount.

-Position Increment per gained lot, taking advantage of asimetrical results derived from rate of exchange characteristics, taking a higher position when we are short in our currency. This strategy explanation is very simple. Let´s see how currency exchange works:
Let´s assume that we have EUR as our account currency. When trading EUR/USD in currency market, we earn or loss USD. So:
-if rate of exchange goes from 1.20 EUR/USD to 1.30 EUR/USD, we would have won or lost 0.10 USD
-if rate of exchange goes from 1.20 EUR/USD to 1.10 EUR/USD, we would have won or lost 0.10 USD,
then, where is the trick?. The trick is that in the first case we would have won/lost 0.10 USD/1.30 EUR/USD=0.0769 EUR,
and in the second case we would have won/lost 0.10 USD/1.10 EUR/USD=0.0909 EUR.
Therefore, if we follow this strategy, the only thing we should do is to increase our position when our system tell us to be short in EUR, because if we are wrong, our mistake will cost less Euros (if we are short in Euros and we get wrong, that means that the EUR raises against USD, so our loss in USD will cost us less Euros)

initial exchange rate

final exchange rate

win/loss

in Euros

1.20 EUR/USD

1.30 EUR/USD

0.10 USD

0.0769

1.20 EUR/USD

1.10 EUR/USD

0.10 USD

0.0909

Comparative chart:

This chart shows the different Equity evolution (using the same system).
Starting from an initial capital of 10,000 EUR we are going to see 4 Equities:
-investing always the same amount (10,000 EUR) (red line)
-investing Ralph Vinces´s Optimal f determined amount (yellow line)
-investing 10,000 EUR untill have won 2,500 USD, and then 10,000 EUR additionals per each 2,500 USD won (green line)
-investing 10,000 EUR untill have won 2,500 USD, and then 10,000 EUR additionals per each 2,500 USD won, and in short positions 10,000 EUR additional to take advantange of the asimetrical effect of rate of exchange (blue line)

20101012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

And how can we invest 10,000 EUR additionals if we have only won 2,500 USD? (Green and Blue lines).
Unless the rate of exchange is on 0.25 EUR/USD, our 2,500 USD won wouldn´t become in 10,000 EUR, so here is when leverage and warranties appear.
Our currency broker usually give us a 100:1 leverage (even 400:1 for the braves), this mean that with 1 EUR we can move 100 EUR, and the warranties (margin) are 1% of the invested amount.
Note: Trading with leverage and warranties (margin) doesn´t mean to ask for a loan. So we are fulfilling the rule mentioned in "FAQ. How much money to invest in Stock Markets?"

 

Dislcaimer

The information on this web does neither pretend to give any kind of buying or selling stock and/or derivatives recommendation, nor any kind of operative. The outcomes of its application are entirely responsibility of the persons who apply them, rejecting www.gaptick.com and his administrator any kind of possible responsibility because of them.
The outcomes here shown are based on past data, and past data does not indicate future outcomes.
Past rentabilities does not assure futures rentabilities.
This web only pretends to inform about the outcomes of the automatic syistems operated, and of its operations
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