Money Managment Debate on Nial Fuller’s Method: Which Method is Best? You Decide.

Part 1: Percentage vs. Fixed Amount

I recently read an article by Nial Fuller that really surprised me. (Note: I strongly AGREE with Nial on SOME of his points).

Nial talked about why you shouldn’t use a Risk Percentage, but rather a “fixed risk amount.”

His point was that a fixed amount could help you get out of a drawdown faster when you winn a trade, whereas it would take a long period to get out of the drawdown if you continued to use the same Risk Percentage.

This makes sense in a very specific circumstance, but I have to say that I think it’s a very narrow view of Risk/Money Management.

Now, please understand: We, at Winner’s Edge, do NOT suggest the idea of always risking 2%. There is more to the story than that, and I will get into that in the next article, but for example sake I will use the 2% rule in this article as it is a very common percentage used.

Below, you’ll see an illustration of how a “fixed amount” hurts you on BOTH drawdowns and winning streaks; and if you’re a trader, you know that traders definitely go on streaks.

Graph.new[1]

 

The green represents using a fixed risk percentage. This is what we always teach at Winner’s Edge in our free content and in our trading room.

The Red represents using a Fixed Dollar Amount.

Let’s break this down quickly in case the Info-graphic above didn’t clarify it for you.

A trader with a 10,000 account may use 2% risk ($200 of risk) OR use a standard dollar amount (like Nial suggests) of $200.

Now, let’s assume that trader goes on a 10 trade losing streak (very likely to happen over the course of a few months of trading assuming this is an intra-day trader).

The account size will lessen each time the trader takes a loss SO the percent risk will also lessen the dollars that are lost each trade. If the account get’s down to 9,000, the risk will be 180 dollars compared to the trader using the fixed amount who is still risking a full $200.

When the 10 trade losing streak is over, the percentage has helped eliminate SOME of the pain, where the fixed amount has not. A full $2,000 would be lost (or 20% of the account) using the fixed amount; while the risk percentage still got hit with an ugly loss of $1,829.00 (about 18%).

Both drawdowns are certainly bad, but when capital preservation is the number one rule, I think it’s safe to say that a full 2% LESS drawdown is a big deal.

And the same principle applies when that trader goes on a winning streak:

A fixed amount doesn’t take into account the growing balance and therefore limits your leverage and your gains when the tide is turned.

For me, as a trader who goes on streaks, the evidence is clear. Trading with a percentage simply makes sense.

Before I pass along the next article concerning Risk which is going to dive into What Percentage You SHOULD Risk, I want to get your feedback on part 1.

Share it if you don’t mind, but more importantly, leave a comment with your thoughts. Feel free to disagree with my analysis, but be sure to tell me WHY if you do disagree.

Thanks so much for taking the time to read, I’ll be sending part 2 out very shortly!

 

 

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  • You only mentioned 2 types of Money Management (MM) in your article. What about the many others? Inside Martingale and anti-martingale systems you have Fixed Percentage (also called Fixed Fractional MM), Fixed Amount, Cost Averaging, Pyramiding, Optimal F MM, Fixed Ratio MM, Smoothed Ratio MM, and quite a few others. If you are going to discuss one or two of them, you should speak about the others as well.

  • A position trader, and swing trader must come up with their own specific trading management plans.

  • Yehezikiel Mel Melliun

    It depend on your trading strategy and what type of trader you are. For an example do an arbitrage trader like warren buffet using 1 or 2% of his capital or equity and for hedging trader are they calculated their risk using fixed % risk? How about position trader and swing trader who using multiple position and trail their position?

  • Nial Fuller is ‘fuller’ of shit than an unflushed toilet. It’s obvious he’s not a professional trader as he presents himself. I pity the poor saps who pay him money to learn how to lose more money. Maybe I’ll get down sometime to write a long article addressing all his BS.

  • Chris capre

    @Adam – ask any fund manager, and they are not risking ‘Fixed Dollar’ amounts because the numbers are too big to float/calculate.

    They do a fixed % of their account, and they list results of their performance in %-age terms, not dollar amounts.

    Unless you have mathematics to back this up (and lets be frank here, risk management is all about mathematics), then your suggestion has no meaning behind it.

    Kind Regards,
    Chris Capre

  • Adam Ondrejicka – tradingroup

    I think it is a big misunderstanding of this concept. It is great to risk % of your account but it start to be a problem as your account starts to be too big. Then you have to switch to fixed dollar risk.

  • Chris Capre

    Hmm, there seems to be a confusion here Horlique.

    Nobody is saying one of them is ‘perfect’. It’s a question of pure numbers as to which one performs better. You are welcome to have a ‘preference’, but if we can mathematically demonstrate in 60, 70, 80 or 90% of the various permutations the fixed % equity model is superior, then you are losing money, or simply throwing it away by using the fixed dollar method.

    ‘Preference’ has nothing to do with this if you are trading professionally. The math and numbers are what matter, Work at a bank desk and ask them if you can use your ‘preference’ dollar risk model when they can mathematically tell you it’s inferior. Let me know how that goes.

    So unless you can demonstrate otherwise that the fixed dollar method is superior, showing the numbers, particularly when its applied to your method vs. the fixed % equity model, then your ‘preference’ or argument is baseless and simply personal bias.

    And the word ‘perfect’ here does not apply, nor has any meaning here. The numbers are what matters. Using a mathematical model that gives away more of that edge over time is ridiculous, idiocy and throwing money away, which you are welcome to do.

    And unless you can demonstrate that the fixed dollar method has been ‘proven by thousands of traders’ to be superior, this statement is completely empty and devoid of any meaning.

    Also your comments about ‘percentage returns’ really has no relevance to this conversation, or anything about risk models and the mathematics of what is superior.

    Kind Regards,
    Chris Capre

  • Horlique2

    I have read nial fullers fixed dollar method and the % risk method as discussed on many blogs/forums.
    The truth is that both of them have their merits and demerits none is perfect, people should
    learn to accept the fact that pro-traders/mentors make decisions based on their trading personality,
    their trading system and the way they understand the market dynamics.for example am a fan of
    daily chart trading because its works for my personality thats does not mean that my cousin in new york
    who makes money consistently trading intra-day is a genius it means that i cant sit all day
    staring at the big computer scanning for trades..
    My cousin is afraid of even opening the daily timeframe AND HE THINKS AM CRAZY TO TRADE DAILY CHARTS…

    If you have a excellent system and you know the weaknesses and strengths of your system you can comfortably
    adopt any risk management approach which is suitable based on who you are…..
    IF YOU DONT KNOW THE WEAKNESSES/STRENGTH OF YOUR TRADING ARSENAL THEN YOU SHOULD NOT TRADE LIVE YET..
    Theres no approach between the two that is perfect…. people will always try to present their
    ideologies as the best its human nature to always want to be the best….. Every trading course available
    online will definitely proof to be the best…

    I used price action strategies on the daily chart to make consistently and my cousin
    uses another price action method to make money consistently on the intra-day timeframes. Am currently posting
    very accurate free signals on most public forums using daily-chart-price-action-signals….

    Forex trading is all about making money whatever works for you used it,Percentage returns in any financial
    markets is very relative someone can make 300% in a year with $1000 account and another can make 12%
    on a $10,000 000 account size everyone will prefer the guy that makes 12% on a $10,000 000.
    A guy i knew used to make 30% profits every month on a $10,000 when he was given an account size of $200,000
    to manage he lost all the funds in two months…

    By looking at risk in terms of money i have been able to follow my risk management plan very well.
    And i know others prefer the % model which i strongly believe is also working well for them……
    THE FACT IS THERES NO PERFECT APPROACH IN TRADING, YOU MUST USE WHAT WORKS FOR YOU SIMPLE…
    WHAT THING I DONT DO IS TO RIDICULE OTHER PEOPLE’S FOREX STRATEGIES THAT HAVE BEEN PROVEN BY THOUSANDS OF TRADERS TO
    BE EXCELLENT…….

  • Chris Capre

    sorry – one correction below…
    ‘we’ve demonstrated your main point above is false’ about Nial ‘avoiding’ intraday charts which we’ve shown is not accurate at all.

  • Chris Capre

    Hello Diego,

    First off, trading intra-day charts or daily/4hr charts has nothing to do with the risk models or this discussion. The numbers clearly show that a fixed % model is far superior in an overwhelming amount of scenarios vs. the fixed dollar amount.

    Secondly, you are mistaken about Nial ‘avoiding’ intraday charts. Case in point, in his Jan. 9th commentary, in the last line he states the following, ‘traders can watch for intra-day or daily chart…’ He also mentions ‘intra-day’ signals to watch on the 8th as well.

    Lastly, even though we’ve demonstrated your main point above, what evidence do you have my approach isn’t ‘complete’? And what does that even mean?

    Being that we’ve already demonstrated my risk model is far superior, the only evidence presented thus far completely favors my trading to be more ‘complete’. But I’m open to other evidence if you have it to support your claim.

    Kind Regards,
    Chris Capre

  • Diego

    Nial avoids trade intrady-charts… so regarding it I can say that you approuch is not that complete!

  • ozcyanide

    Such a Tucci way of looking at things! If I didn’t know better, I’d say we were related!

  • Chris Capre – 2ndSkiesForex

    Hello JB,

    First off, if you read the 4th paragraph of Nathan’s article, he states, “This makes sense in a very specific circumstance, but I have to say that I think it’s a very narrow view of Risk/Money Management.” So it appears he is not specifically trying to prove Nial’s statement was wrong, but moreso it seems like he’s saying its a narrow view that Nial presents.

    But lets run the numbers in your scenario, seeing what happens next if you have a winning streak of 10 after the losing streak of 10. The numbers are below:

    The Fixed Dollar Model will have a balance of $10,000 after the 10 winning trade recovery, while here is how the numbers work out for the Fixed 2% Model:

    $8171 at trade 10

    $8334.42 at trade 11

    $8501.10 at trade 12

    $8671.12 at trade 13

    $8844.54 at trade 14

    $9021.43 at trade 15

    $9201.85 at trade 16

    $9385.88 at trade 17

    $9573.99 at trade 18

    $9765.06 at trade 19

    $9960.36 at trade 20 for fixed 2% rule

    So $9960.36 using fixed 2% model vs. $10,000 at fixed $200 dollar model. To translate this, you gain $40 more by using the fixed dollar model, which = .4% better performance.

    In comparing the numbers:

    During 10 loss DD, you get 1.71% BETTER performance (or lesser DD) using fixed % model.

    During 10 win UD (updraw) you get .4% LESSER performance (or lesser gains) using fixed % model.

    1.71% lesser DD and .4% lesser gain. So overall, the fixed % amount seems to be a better performer.

    But lets take this a few steps further and lay out 4 different outcomes from here to see which performs better. They are;

    Scenario 1 = 10 more straight wins from trade 20 W

    Scenario 2 = 5 more straight wins from trade 20 L

    Scenario 3 = 5 more straight losses from trade 20 W

    Secnario 4 = 10 more straight losses from trade 20 W

    In Scenario 1 (10 more straight wins from Trade 20 / T20)

    The two balances are currently $9960.36 for fixed % and $10,000 for fixed dollar.

    After 10 more trades (T21-T30), the fixed 2% model will have a balance of $12143 while the fixed dollar model will have a balance of $12,000.

    Thus, when you sum it up, the fixed % model has $143 MORE in profit, or a 1.2% GREATER gain. Hence the fixed % model wins this scenario

    Onto Scenario 2 (5 more straight wins from trade 20):

    After T25 (or 5 more straight wins), fixed 2% model has a balance of $10998.69 while the fixed dollar amount has a balance of $11,000, or a whopping $1.31 more, which is only a .01% gain over the fixed % model. Pretty weak difference.

    But we’ll still chalk this one up to a win for the fixed dollar model.

    Scenario 3: 5 more straight losses from trade 20

    At T20, we have a balance of $9960.36 for the fixed 2%, while a balance of $10,000 for the fixed dollar amount.

    By T25, the fixed % model has a balance of $9002.78, while the fixed dollar amount has a balance of $9000.

    So in this case, the fixed % model has $2.78 in MORE profit, or a .03% gain over the fixed dollar amount. Hence this is chalked up as a win for the fixed % model.

    Now we know the answer gets uglier for the fixed dollar model as this goes on, but lets look at the numbers for scenario 4.

    Scenario 4: 10 more straight losses from trade 20

    By T30, the fixed % amount has a balance of $8136.84, while the fixed dollar amount has a balance of $8000. So the fixed % amount has $136.84 MORE in capital, or a 1.7% gain over the fixed dollar amount. Hence the score is 5-1 for the fixed % model over the 4 scenarios here and the two presented by Nathan.

    In summary:

    Aside from the numbers already presented by Nathan which are both wins for the fixed % model:

    Scenario 1: fixed % model has 1.2% BETTER performance v. fixed dollar=W for fixed %

    Scenario 2: fixed dollar model has .01% BETTER performance v. fixed %=W for fixed dollar

    Scenario 3: fixed % model has .03% BETTER performance v. fixed dollar=W for fixed %

    Scenario 4: fixed % model has 1.7% BETTER performance v. fixed dollar=W for fixed %

    Another way to translate this if you add all the % gains across these 4 scenarios, the fixed % model has a 2.92% BETTER performance than the fixed % model and more profitable 3 out of 4x.

    Hence in total, when you look at the numbers across these 6 different scenarios + yours, the fixed % model tends to OUTPERFORM the fixed dollar amount in 5 out of 7 scenarios, or 71.43% of the time.

    Also when you look at the best performance for each model (1.71% for fixed % model vs. .01% fixed dollar model), the numbers heavily favor the fixed % model.

    In conclusion, when you look at numbers, the fixed % model across several tests (including the one you mentioned) overall appears to be superior than the fixed dollar model.

    Now as stated earlier, this discussion is really about the numbers, and thus far Nial has yet to present which demonstrate his point or claims which are looking flimsy up against the numbers.

    Yet on the other side, Nathan and I have now presented several scenarios which compare the performance of the two models, and clearly demonstrate how the fixed % model tends to outperform the fixed dollar model.

    I would like to state I am welcome to see evidence to the contrary if/when it is presented as I am totally open to seeing it. Until then, the numbers clearly favor the fixed % model.

    Hopefully this clarifies things a bit.

    Kind Regards,
    Chris Capre
    2ndSkiesForex

  • Chart Wizard

    Yes, but MT4 seems designed with this capability and I haven’t seen nor heard of it being applicable to TradeStation or Ninja. The Broker is always responsible for shady behavior. They provide the data feed and filter price however they want, they (often) take the other side of your trades, they increase the spread at irregular times (or around news when it also guarantees them profits), etc.

  • NathanTucci

    Hi JB, thanks for the comment and my apologies for rounding the number up to 2%. I surely did not get into EVERYTHING Nial discussed. My goal in this 1st article was simply to point out an ugly reality about the fixed dollar amount model due to the fact that all traders go on streaks assuming a large sample of data. Streaks (like in sports) can KILL you OR be your biggest asset; I would rather them kill me less and be more of an asset when they occur as I know they will. I do appreciate your point and I will discuss it in more length in my next article.

  • JB

    Hi

    1. The difference between a 2,000 loss and a 1,829 loss is not 2% as you suggest. If you are going to try to prove that a % risk model is best, you should brush up on your simple maths first.

    2,000 – 1,829 = 171. 171/10,000 = 0.0171 = 1.71%

    2. You set out to prove that Nial’s statement was wrong when he said a fixed dollar amount gets you out of drawdowns faster. But you do not address this at all. You give us a graph showing what happens during a drawdown, but you do not extend this graph to show us what happens in order to get out of the drawdown. I agree that the percent risk approach makes the drawdown smaller, but what happens next if you have a WINNING streak of 10 (which is just as likely as your example of a 10 10 losing streak) after your LOSING streak? Now, the fixed dollar amount is best because it gets you back to breakeven quicker.

    So, who is right? The fixed percentage model makes drawdowns smaller, but the fixed dollar model gets out of a drawdown quicker. Wouldn’t the “right” method depend on what the trader wanted most – smaller drawdowns or quicker recoveries?

    3. I neither agree nor disagree with any of what your or Nial say, but what I do object to is someone who tries to make a point but either makes basic mistakes or doesn’t actually give us the whole picture. I look forward to your next article, in which I hope you address these problems.

    Thanks

    JB

  • Johann

    I have been taught from the beginning of trading to only risk 1%. It works for me on loosing and winning streaks. Just protects your investment.

  • Chris Capre – 2ndSkiesForex

    Hello FxSniper,

    Why do you think this issue won’t resolve by discussing the various points and bringing new information to light? If one has a fixed and solid mind about it, then sure, it will not resolve. But Nathan seems quite open to any new and solid evidence contrary to his thoughts on it.

    So does Hugh. So do I along with others, thus it seems like we can go back and forth and resolve a lot as we clarify and amplify things here.

    But you say you do not see the fixed % model as more intelligent or better. What maths and evidence do you have to clearly demonstrate it is not, or that the dollar risk per trade is better? Maybe I missed it, but I haven’t seen any presented, so just curious what you are basing this on?

    If you have it – please share as we would all be interested in seeing to clarify our doubts and take in as well.

    On another note, there seems to be some confusion here on several points:
    1) Nathan seems to get the key points of the article quite clearly as he addresses them in his comments and article. In fact, he seems to do a much better job at explaining how his MM rule is superior using a common trading environment, while on the other side – Nial presents no evidence or math to support his claim.

    2) Nial discusses needing a solid edge, which is certainly possible using a fixed equity % rule, including the 2% rule. He provides no counter-evidence this model provides no edge, nor isn’t successful as an MM strategy.

    3) It should be noted losing decreasing amounts of money on each trade (via the 2% rule) doesn’t ’cause’ you to trade more. Nor does it make you less sensitive to risk. If anything, traders as they lose more and more become MORE sensitive to risk because each new loss impacts their confidence (ie. psychological capital).

    Nathan using his model of several losses in a row (which Nial is implying here in the article) actually demonstrates how the 2% rule SAVES YOU MORE MONEY during drawdowns, along with several wins in a row.

    Nial presents no evidence to the contrary.

    What ’causes’ you to over-trade is you focusing on the lost money, the losses on every trade, along with not following your trading plan / discipline, etc.

    Its not your MM rule that leads you to ‘gamble and over-trade’. It’s your ‘mindset’, your lack of discipline, impatience, and focus on the wrong things that cause you to over-trade. The MM rule has nothing to do with it.

    4) Most day traders and scalpers actually use a much lower % than the 2% rule (often times 1%, or .5%, sometimes even lower), because they are taking several, if not dozens of trades per day.

    Using a 2% rule per trade as a scalper or day trader will likely push either of them well OVER their daily limit if they have several losses in a row, so Nial is completely off on this one.

    Although I agree, risk can and often does change over time with skill, + a greater baseline (data set) of information about one’s strategy / performance – nobody using the 2% or fixed equity % rule correctly is changing it per trade.

    Anyone changing this level (or even dollar per trade) per trade will have to constantly recalculate their edge because they are constantly using a moving variable.

    Without a computer program to do this (like MatLab), there is no way to accurately predict your risk of ruin, expectancy or MM stats as the main variable is constantly in flux. To do this would be ridiculous.

    Now regarding some other key points:

    It should be noted Nial is a huge fan of the Market Wizards. But read through the Market Wizards or New Market Wizards and notice how virtually NONE of them discuss a dollar risk per trade model.

    However THE MAJORITY OF THEM do discuss % risk models. Food for thought.

    Also, it should be noted Nial makes some really ridiculous claims here, such as;
    a) “the 2% rule is nothing more than propaganda spread by brokers to see you lose slowly.”

    First off, its becoming clear Nial really doesn’t understand the broker model that well. Why do I say this (besides the fact I worked at FXCM for 2 years as a top broker)?

    FXCM and other brokers spend a ton of money, time and effort on client acquisition. Their ideal client is one who stays in the game and makes money (particularly if they are on their non-dealing desk model), so they can keep receiving the spread revenue (which is their main revenue source of income).

    Losing clients means less money for them because they have to spend more to acquire new ones.

    Most brokers today have a majority of their clients on a non-dealing desk option which allows them to have no counter-party risk to their clients.

    So as a whole, Nial is completely incorrect here as most brokers do not want to lose clients, or have their clients lose money over time. That leads to more money wasted on NEW client acquisition when they could be retaining them, collecting ongoing and gradually increasing spread values over time.

    b) another ridiculous claim is the “2% rule is for losing traders to lose their money slowly.” Again – what evidence does he present to demonstrate this? None, so why should we accept this? We shouldn’t.

    I will say I do agree MM and the method/strategy are incomplete without factoring in the other so we agree on this point completely.

    But hopefully this brings some other things to light and clarifies them a bit.

    I do look forward to Nathan’s follow up articles and information about this interesting and important topic. As stated earlier, I think the best way to really open this discussion up is through the numbers, evidence and examining both sides via the math and results.

    I am certainly open to seeing evidence from both sides (or other sides) and changing my position based on clear, sound quantitative models and information.

    Kind Regards,
    Chris Capre

  • FxSniper1

    May I add that the debate is not about Getting Losses Back and his article and thought is not about that absolutely.

  • FxSniper1

    We could go back and forth on this issue ad infinitum and it still won’t resolve anything. I have examined both models on a personal level (and I can assume you would agree that much of trading is personal) long before and I do not see how the percentage model is better and more intelligent. A certain Paul above has pointed out some assumptions upon which your model is based and when those plethora of assumptions are accounted for, your model becomes less and less objective. It should be understood however that whatever it is, the dollar based model is not blind and certainly not gambling as you stated. The basic assumption is that you have a clear trading edge and know what you are doing to begin with, be it in terms of price action based edge or anything else.

  • bill

    The other side of the story, winning more with an adjustable trade size. I adjust my 2% once a week to keep it simple.

  • Hugh Kimura

    Looking forward to it Nathan!

  • Valeriu Steel Rod Crainic

    I cannot explain further, since this is nothing but my writing style, but from previous feedback, reading it carefully and redo it 2-3 times will help tremendously in understanding it. But I’ll post a tl;dr version: fixed percentage is either for beginners or those with less-successful trading strategies.

  • NathanTucci

    Ron, you could not be MORE CORRECT. The entire point is whether or not I can PROVE that the % model is mathematically and objectively better. I think I can prove this, I hope you will tune in to my following articles to give me your feedback

  • NathanTucci

    Hi Hugh! Thanks for the comments and I could not agree with you more. Specifically with your point about if you are down 50% than you have MUCH bigger problems than your opinion on % vs dollar amount. Great feedback, I hope you will weigh in on my next article as well!

  • NathanTucci

    HI Souvik.. Interesting thoughts. I would ask you to elaborate but I am not sure how much you can elaborate beginning with the premise that Money Management rules are BS 😛

  • NathanTucci

    HI Phil, thanks for the comment

  • NathanTucci

    Hi Chris… WOW. Thanks for taking the time ( a lot of it, it appears) to comment on this article and address all of these things. Your thoughts and comments are much appreciated and I am in much agreement. I am going to dive into a lot more of the detail of this debate in a follow up article (or 5 :P) and I hope you will weigh in there as well. Thanks!

  • NathanTucci

    Hi Mike, thanks for the personal example and comment. Great to hear from your point of view on this.

  • NathanTucci

    HI Phoebe, interesting point. I would say that if you don’t have the funds to trade meaningfully, you probably shouldn’t be trading. Over leveraging to make meaningful gains is a dangerous approach in my eyes.

  • NathanTucci

    Graeme, a LOT risk would mean that you are exposing yourself to more risk when the market requires a larger stop loss. I would heavily advice against this.

  • NathanTucci

    Hi there, I don’t know that I quite understand your thoughts here. Wouldn’t risking 2% per day require you to know what trades you may make in the future so that you knew how much to risk in the first trades? Maybe I am not understanding your comments appropriately.

  • NathanTucci

    Daniel, I certainly agree. Taking that to the next level though, what is the BEST way to approach the defined risk management strategy?

  • NathanTucci

    Hi Colin, thanks for your intelligent comment here. It is appreciated. I agree that I like Nial’s stuff-he has excellent content. What I would like to TRY to prove here is that there IS a right answer though. The easy way out seems to be that there is “no right or wrong answer” but I would like to challenge that theory with the coming articles on this topic 🙂

  • NathanTucci

    Hi Fabrice, “risking a dollar amount you are comfortable with” sounds like a nice idea, but does that not throw the probability and mathematical edge that a POTENTIAL profitable system would have?

  • NathanTucci

    HI Wayne, as always, thank you for your participation. May I ask an example of how it would be an edge at a point later on down the road as you mentioned?

  • NathanTucci

    Risk Level to circumstances is a little vague, Peter, could you give me an example?

  • NathanTucci

    Hi there, thanks for reading! .. Important question for you: “cutting your losses and letting your winners run” sounds lovely, but what does that mean?

  • NathanTucci

    Hi FXsniper, I did not miss his point at all. As I said to start off, I agree with most of what he had to say, what I did not agree with was his stance on “getting your losses back” for lack of a better phrase. Also, if you are “re-deciding” how much risk you can take on each trade opportunity that qualifies within your system, you might as well throw the system out the window and head to a casino because changing your risk around based on what you “feel” you can handle at that given time is 100% gambling. The beautiful thing about a profitable strategy and set of guidelines that go along with that strategy is that you can confidently expect a profitable result over a large sample of data. If you change the risk around every trade, the results are chaotic and random and meaningless… and very likely unprofitable.

  • NathanTucci

    Hi Aryan, thanks for the comment. I agree that trading is relative to a very large extent; however, my attempt here is to argue that the percentage model is an objectively more intelligent and profitable way to approach risk, regardless of your opinions, tendencies, etc. I will get more into that in the following article.

  • NathanTucci

    HI J, thanks for the comments. Risk to Reward is essential, but I would hope you are using the same risk amount regardless of the size of your stop loss or the amount of pips you plan to target

  • NathanTucci

    Hi there, I don’t understand your logic. Maybe you could reply with a more in-depth explanation.

  • NathanTucci

    See comment above. Mt4, itself, would not be a factor–the broker would be the one responsible for any activity.

  • NathanTucci

    Hi there, thanks for the reply.

    I have to say, your reply didn’t seem to communicate much. Seemed more like a slew of fancy phrases that didn’t amount to anything–not to be offensive, just want to get to the bottom of the issues.

    Also, MT4 is a terminal. As you said in the very same sentence, it is the broker that would determine your accusation and we don’t use a broker that trades against us so again I would say that I am having trouble finding substance in your comment.

    Thanks for taking the time to read my article though.

  • NathanTucci

    Hi Paul, thanks for the thoughts and comments. As Chris pointed out below, I think my thoughts and demonstration are still relevant for traders who aren’t trading intra-day.

    I think the risk percentage should be based on your trading capital whatever you view that to be and I will get more into that in my follow up article.

    Lastly, there are many factors when approaching risk, I agree, however I would say that none of the factors I can think of would point heavily toward a fixed amount. And I am only assuming that there will be streaks, not that streaks will be constant.

    Thanks again for the intelligent thoughts. Look forward to your reply in my next article.

  • NathanTucci

    Hi Lew, thanks for the comment.. Yes, if you don’t protect your capital, you’ll never increase your capital.

  • NathanTucci

    HI Gene, I have to say, this is a response I am really shocked by. A 2% difference in my opinion is massive. In such a tight battle for profit, every percent is essential!

  • NathanTucci

    Hi Ivo, thanks for the comment. I do appreciate it. I am going to get into more detail about some of the things you pointed out here in my next article.

  • NathanTucci

    Thanks for the comment! I appreciate your feedback.

  • ron

    either approach will work IF intelligently applied,however the argument that using %risk mathematically makes more money is simply incorrect and is based on way too many assumptions. I usually use a fixed amount to simplify trading( and adjust as makes sense)

  • Hugh Kimura

    Haha, nice. That article surprised me a little too. Bottom line is that I think he is just trying to be sensational, purely marketing.

    One thing that I’ve learned is that there are many ways to become a successful trader, so I’m not going to say any one method is totally wrong if it consistently makes money. However, there may be more going on behind what he is saying that he cares to express or realizes. When you get to his level, he is probably good at “loading the boat” when he sees a high probability setup.

    But for non-professionals, four things jump out at me…

    1. If you are increasing your position size if your account is down 50%, isn’t that effectively Martingale?

    2. If you are risking only 1-2% and your account is down 50%, then you have bigger problems, namely: no positive expectancy. You should stop trading or reduce position size until you get on track, not trade bigger.
    3. Trading 1-2% after a big drawdown doesn’t lead to over trading. Over trading leads to over trading, meaning that there is a fundamental psychological flaw with the trader that needs to be addressed. Trading bigger will only compound the problem.

    4. If you trade a $ size that is “comfortable” for you, that can trap you in a trade size that is relative to your financial situation. For example, if you think $100 is “reasonable”, then you are only going to risk that much in a $25k account. Kinda goes against the crux of his argument. Vice versa, if you trade $100 in a $500 account, is that smart?

    If you read the Market Wizards for any books of those kind, taking a small % risk is generally the advice given. My guess is they know what they are talking about. I’m not a professional trader, but I do work closely with one, and Rafael stresses fixed fractional risk and not Martingale-ing when you are down. Based on his track record, I think he knows what he is talking about too.

  • Chris Capre – 2ndSkiesForex

    Hello Fabrice,

    I am glad you found my thoughts useful along with talking about trading in a simple and direct manner. Hopefully the ideas can have a positive impact on your trading.

    Kind Regards,
    Chris Capre

  • Fabrice Goeyvaerts

    Hello Chris,

    Thanks a lot for your thoughts on this article and sharing your experience. I went on your site and read the article about “Getting back your losses”. I don’t wish I had read it before as I’ve learned from that experience. This is the past now 🙂

    I also read other articles you wrote and that I’ve found very useful.

    I really appreciate when experienced traders talk about the real world of trading in a direct manner.

    Regards,

    Fabrice

  • souvik

    This moneymanagement rules are all BS…..if your strategy can not save u then no one can……..

    I use max risk as my strategy suggests…..Hit while the IRON is HOT……….

  • Phil

    Agree with your use of fixed percentage stops vs. a fixed amount. Both work, but when things go badly you need to tighten up, and when things go well, you need to stretch out and go for more, All told, the name of the trading game is gambling (without a house fixing the odds) and percentage rules are sound betting techniques.

  • Chris Capre – 2ndSkiesForex

    There are several different topics floating around here and some really good points, questions and objections made here. I’ll attempt to address them all in one shot as I have some experience and thoughts on the subject both from a retail and institutional level:

    1) @Ivo – patience in terms of trading is critical. Traders tend to do better when they are more focused on the process instead of the dollar gains. If the fixed % approach increases patience while reducing the ‘triggers’ emotionally/psychologically when trading, then it will serve the trader moreso in the long run.

    Also, it should be noted there are risk models called ‘dynamic economic modeling’ which allow the trader to say have a baseline of 1% risk per trade, but when in a losing or winning streak, as long as there is enough data on the system’s performance, then the % risk can be increased or decreased. Food for thought.

    2) @ Gene B – the odd numbers is not an issue as many platforms now have add ons that calculate the size of the lots needed to adjust for % risk. FXCM TS2 is a great example. This will only continue to be the case as platforms develop and can do this calculation on the fly – so eventually your objection becomes a non-issue.

    But on another point – if a trader is not willing to do the small details (or as you say) ‘bother to keep track of the percentages’, then likely they are not willing to do the other important small details to be successful.

    Professionals at all levels keep track of the details, particularly the little ones as they often have a huge impact on performance. Ted Williams could tell a 1.4% difference in the weigh of his bat and how it affected his swing. He also was one of the first batters to not put his bats in the dirt because he realized the moisture from the dirt would get absorbed into his bat and thus make it heavier. That is paying attention to the details!

    There is no ‘bother’ in doing it, its just done as they realize its part of the work and responsibility of performing at a high level.

    To someone who is not passionate about their work, the little details are a ‘bother’. To someone who is passionate about their work – it is not a bother, and is a challenge / responsibility they enjoy taking on.

    If I skip details in my work, myself and my clients lose money, and a lot of it. Food for thought.

    3) @ Paul – It doesn’t really matter whether its an intra-day trader or not, the same issue could come up regardless of trade frequency.

    I do agree with you its important to find out your level of comfort when it comes to risk. But I think its naive to think professionals do not run into streaks. All of them do in virtually every skill based endeavor, whether its sports, music or trading. When you have a large enough data set, streaks are inevitable on both sides.

    Even a stable set of data like flipping a coin could run into 10 heads or tails in a row, and that is about as stable as one can get over time.

    4) @Jayin SoCal – Yes, agree with you as it depends upon a lot more variables and ones trading model. It should be noted the risk of ruin formula is not calculated based on dollar risked, but fixed risk %. I wrote an article about the risk of ruin along this subject here;
    http://2ndskiesforex.com/strategies-for-forex-trading/forex-articles/money-management-performance-secret/

    But doing the risk of ruin calculation via dollar amount risked per trade is far more work than using a % equity risk model.

    The MT4 issue is really a side issue and not really relevant to the subject of risk models so not much to address here. It does not invalidate the data pointed out in this article.

    5) Valeriu – where do you get this idea fixed % models are for people who do not make up their own strategies, or borrow them, or are complete beginners? What evidence do you have to support this that the industry is not using fixed % models?

    Second, it is incredibly difficult to ‘switch off’ from the ‘psychologica’l / ’emotions’ in trading as they are not just coming from the brain, but the body as well. Just our brain alone is not evolutionary wise programmed for trading, so we are heavily wired to actually experience emotions and various psychological effects while trading.

    Even high level athletes who have heavily trained central nervous systems experience these ’emotional and psychological’ changes whether under low intensity situations or high intensity situations.

    Case in point, try putting two fingers on your carotid artery which will give you an idea of blood flow to your brain. Try just doing it in a normal relaxed setting. Then try thinking of all the words you know that start with the letter x or z and notice how the blood flow increases.

    This is just a basic test and a low stress environment in comparison to trading. Do you think that blood flow increases during live trading? I’d think so, and the increased blood flow can and often will represent greater activity and potential for emotional/psychological stress that cannot be so easily ‘switched off’ while trading.

    A good book on this which talks about the difficulty of ‘switching off’ the psychological/emotions is ‘The Hour Between Dog & Wolf’

    6) @Aryan – you say it is unlikely many traders will experience 10 losses in a row, but professionals on every level have this all the time, in baseball, 9-ball pool players, high level football quarterbacks, and traders.

    Do you think Peyton Manning is going to completely change his throwing process just because he has 10 incompletions in a row? Unlikely.

    If you’ve made 5,000 + trades over the last several years, 10 losses in a row happens, but means very little in the long run as you could as easily hit a 10 win run as well.

    Second, a % risk model is also something that can be flexible if the account size increases to where it would be psychologically uncomfortable to risk 2%. If you know your risk of ruin, you could easily switch to a 1% or .5% and know your mathematical chances of making money. Inversely you could also risk a higher % amount on a system that has a greater sharpe ratio and stability over the long run>

    But a dollar amount chosen method would be harder to calculate and also would likely trigger MORE psychological discomfort (which I address in my article above).

    7) @FxSniper1 – having to decide an arbitrary amount when hitting that level of discomfort, is actually a longer risk calculation and thought process to accurately know how your different level of risk chosen affects your bottom line, as opposed to just choosing a different % risk to adjust to. Food for thought.

    8) @Fabrice – if you are getting impatient trying to get back your losses, then you are missing a key point of trading. You cannot ‘get back losses’. They are gone. You can only make money anew.

    Focusing on ‘getting back your losses’ is being stuck in the past and will distract your concentration from the present moment and market in front of you – which is where it belongs. Its also more likely to trigger further emotional/psychological issues which will affect your trading even further (which you noticed as well).

    I wrote an article about it which you can read here (http://2ndskiesforex.com/strategies-for-forex-trading/forex-articles/getting-back-your-losses-in-trading/), but Quarterbacks in the NFL aren’t trying to ‘get back their incomplete passes’. They develop a healthy/selective set of amnesia and forget about the bad pass or interception, so they can drive their energy, focus and concentration into the next pass in the moment. Same for golfers, and same for professional traders.

    Food for thought, but over-leveraging to try and get back losses is more likely to disrupt your risk models even further.

    So the issue here as you mention is not about using the wrong risk model, its more of a ‘psychological issue’ which you intuit. And capital preservation along with performance as this article represents is generally better served using a fixed % model.

    9) @Mike G – the fixed dollar risk is not something that makes more sense for those with larger trading capital. Go talk to any of the various prop trading desks that also have training programs and ask them what models they use. You’ll invariably find more of them using % risk models instead of dollar per trade models. I can list a few if you need examples.

    Also talk to some of the larger FX money managers in the business which you can find via the Barclays performance index. Contact them and ask them what models they are using – again you’ll likely see the same result.

    In reality, using the % risk model is even more important when you are trading larger capital because as the numbers go up, the calculations become harder to obtain if you were using a fixed dollar amount. Try doing this on 7, 8 or 9 figure accounts.

    Again, you are far more capable of working and understanding your risk models/calculations if you are using a f% risk model and not a dollar per trade model.

    In Closing
    What Nathan does here is mathematically demonstrate a particular and common environment where the dollar risk per trade model fails on both the upside and downside. I would be willing to bet if you were to take say 20 or 30 common trading performances (all varied) and compared the % equity risk model to the dollar risk per trade model, the former would outperform far more than the latter.

    Perhaps its time such a study is done (as it likely has) to clarify the arguments further.

    Nobody in the comments is making such an argument and just using limited scenarios to argue one point or the other. I’m willing to have my opinion changed in the face of highly suggestive or conclusive mathematical evidence the dollar risk per trade model performs better, but I have yet to see this.

    Nathan does a good job of illustrating how the dollar risk per trade model fails completely in an environment many traders will likely experience over the years. Perhaps he can run several other scenarios and compare to shed further light on this.

    Perhaps that is the next step for us to reserve judgment until we see greater evidence for either case.

    However my experience over the last 13+ years suggests the % equity model requires less work, is far simpler, more elegant, and increases performance in most scenarios.

    It should be noted a lot of my comments to the people above are about giving alternative suggestions, along with challenging the statements and claims made.

    Hopefully I have provided some insight on the important subject, while presenting some helpful information, experience and questions into the matter.

    Kind Regards,
    Chris Capre
    2ndSkiesForex

  • Mike G

    Firstly, I would like to say I am an avid reader of your articles Nathan and those of Nial too. I’ve found this debate very informative being a relative newcomer to forex trading. It seems to me, The fixed dollar risk approach makes sense for those traders with large trading capital who keep a smaller subset in their trading account to cover potential margin calls. For smaller traders like myself it is less obvious. I used to trade with 1% risk per trade but now prefer to trade with a fixed dollar amount because I know how many consecutive losing trades I have in a month before I will stop trading. If maybe at some point as I gain more experience I will revert back to the percentage approach.

  • Phoebe Ejimbe

    I am a 2%-maximum fan if trading with margin account 10K and above, and slightly higher for smaller account sizes. My concern is that 2% on a small account may be too small for any meaningful trading.

  • Graeme

    My risk management is at 2% however I calculate risk considering Account balance risk % and convert to LOTS risk. I believe that this a much safer way.

  • joustor

    Risk no more than 2% ( or less ) per DAY, not per TRADE. Trading becomes much easier; you decide the leverage that will not cause a financial hardship on you or your account. Only you, no one else, can decide that level. Try it the next time you trade. See what a difference it will make.

  • Daniel

    No matter what–Risk management has always been my number one rule in trading FX..IF you don’t have a DEFINED Risk Management program and implement it at the time of the trade you are not a professional trader and should not be trading

  • Colin

    Very good to hear another professional point of view on that article Nial sent out a few days ago.
    There are so many aspects of trading that come down to one’s personal preference or risk tolerance and I think this is one of them. Generally speaking professional traders or us traders who have been in the “game” long enough trade based on our “trading personality”. I am from the school like you, a set % of risk per trade and not a fix amount. 99 out of 100 trade related articles Nial sends out I would agree with how ever this is the 1 out of 100 that I tend to not be “in-line” with. There is no “right or wrong” answer it just comes down to what a trader is more comfortable with.

  • Fabrice Goeyvaerts

    Hey Nathan,

    Nial expected some reactions and he was right 😉

    As I don’t have tons of trades behind me, I really don’t know what’s best betweem fixed amount $ or fixed % rule.

    But what I know is that I did exactly what Nial described when my account went from positive into negative territory … using % rule when positive and not using it anymore when negative. I became impatient to get my losses back and over-leveraged on SOME trades that I lost leading my account to a severe drawdown … that’s MY reality and I guess this is very common with beginners. Impatience and not being disciplined = bankruptcy.

    I agree with Nial when he says that we should risk a $ amount we are comfortable with. And this is all that matters to me. But that $ amount must be realistic (when you start driving a car you don’t immediately go on the highway driving at 90 miles/hour … unless you are crazy). I would never recommend to A BEGINNER to risk 1 or 2% per trade. To me this is way too much. 1st objective = getting experience and resist to the test of time, not growing the account. So, yes, capital preservation at the beginning is the key until drawdown is under control.

    Nial is trying to grow small sums of money into larger ones relatively quickly … that’s not a beginner’s 1st preoccupation though.

    Your chart speaks about itself … when we encounter streaks. Streaks that are dependent of strategy, Risk/Reward we apply, win ratio we have (or try to have), frequency of trading, etc. Something you will surely cover in part II.

    So, yes, agree with you that % rule will permit to stay longer in the game when we encounter drawdowns. And that it will increase the gains quicker if we have a profitable strategy judged on a large amount of trades … not a beginner’s level anymore then!

    Complex topic you brought here. Thanks a lot!
    Cheers,

    Fabrice

  • wayne cressy

    Yeah, I agree In principal Nathan, % risk is easier to understand and implement for new traders before they have fixed their strategy and have developed their edge. Once a trader has developed an edge and he trusts it, a fixed risk may work better for him.

  • Peter

    it makes sense mathematically. I always set my risk level to circumstances.

  • JayinSoCal

    Agree with FXSniper1. Couldn’t have said it better.

  • Chart Wizard

    I tend to agree with you about the age-old debate — and especially about red flags being raised due to MetaTrader. I’ve actually seen a live demonstration when someone was trying to get me to invest in a Forex Brokerage. A “Utilities” window was opened and it looked something like a DOM with prices moving up-and-down and the spread staying fairly consistent. Then we got to a place where all sorts of other numbers showed in separate columns and the guy said, “Watch this!” He changed a value in his Utilities window, hit some button, and the numbers just DISAPPEARED. He said they had “absorbed” them by “modifying” the spread. I would never even consider trading Forex after that. He said (I’m pretty sure) that 95% of all accounts are “absorbed” within 6-months of their opening and it was a license to print money.

  • theeseer

    In the age of discount commissions its best to get the heck out of a loser ASAP and let your winners run as you can always re enter the trade. While this technique may in an age of HFT prevent you from getting the entire win on the upside as “back and fill” is the HFT’s way of shaking you out of a trade it nevertheless prevents the ruining of your confidence with a disasterous loss.

  • FxSniper1

    You couldn’t say it any better!

  • FxSniper1

    You totally missed the point of Nial’s argument. Fixed dollar amount is variable in his conception and I agree in toto with that. If you trade with 10k for instance and decided that you can only stomach a 300 dollar loss at once, if you got unfortunate and actually lost your precious 300, next time out, according to the fixed amount principle, you are not by any law required to risk the same 300. You alone know that you have decreased by 300 and must decide again what amount you are ok with risking again in your next trade. Your argument against his is simplistic at best. Thank you

  • Aryan

    Hi, I do not expect any two professional to agree on their prudence
    based on their individual experiences, tendencies etc. The choice of fixed
    dollar or percentage risk for individual traders would depend on their
    experiences, and efficacy of the trading system – above all their tolerance
    level (fear and greed) that would be reflected in the expectancy of winning
    ratio. I suggest that it is unlikely that many traders would experience 10
    losses in a row and if so, they must stop and rethink their system. I also find
    that at some stage the 2% risk would lead to a large sum which may be psychologically
    unacceptable for trader and may attract attention from the broker, for example,
    a position size of $10,000 per point!

  • J

    Not being completely familiar with Nathan’s approach, I apologize if I repeat what you have mentioned before. There is a bigger picture here. Namely the relationship between market structure risk:reward and capitalization rate. I’ll pay no more than $150 (per CME currency futures contract) for the risk based on market structure. Only IF, I have a market structure risk:reward of at least 3:1 and my capitalization rate(Trading Capital/Contract Value) is greater than 5% when I divide that market structure risk($150 or less) into 1/60th of my trading capital to find the number of contracts to trade and I find a way to collapse that risk once I put that risk on ,IE move to break-even than start locking in profit. Allowing market structure to dictate the risk on the potential trade, gives me an opportunity to have a discussion with the market as to whether it’s a variable risk that I want to take on or pass on and wait for the next potential trade.

  • Valeriu Steel Rod Crainic

    Truth is that the fixed percentage is only for those who either do not make up their own strategies (and “borrow” them), or copy portfolios of other individuals. The most important thing a day trader needs is to switch off from the psychological standpoint (thus emotionally) from trading and be analytical as much as possible. I win about 60% of my trades but my gain/loss ration is 2:1, and it’s been weeks since my last loss streak. Risk % is good either if you are a complete beginner or still lacking a good strategy.

  • JayinSoCal

    Old news. Old debate. All over the internet. Completely depends on the trading model with enough documented trades to determine reasonable estimates of robustness, expectancy and risk of ruin, the relationship of leverage to sharp ratio / kelly criterion, etc. Slight variation in the outcome, with the resultant change in the math, can competely reverse the risk strategy one thought was the right one. I’ve seen it happen with my own eyes. So let’s be more nuanced and respect the intelligence of the prospective client, shall we?

    (By the way, your use of Metatrader definitely raises some red flags. This platform was developed specifically for brokers to manipulate client accounts. If you don’t believe me, “Google” it.)

  • Paul

    I don’t know whether its relivent, but your stated assumption is for an intra day trader. Nial expects to take 1 or 2 trades per week, holding for a few days to a few weeks.

    You also haven’t mentioned the amount of risk capital a trader may have to invest and how much of this is actually held in a trading account to use as margin. If you have 50k, you may only place 10k in your trading account. Does that mean you would risk 200 per trade, or 1k?

    I think the most important point is that everyone will be comfortable with a different risk per trade, depending only many factors, but not least individual personality

    What’s your win ratio, what’s your achieved risk/reward, what’s your trade frequency, what’s your pip risk, is ‘spread’ important to your trading strategy?

    Fundamentally, by using the % model, you are assuming that your trade results will always run in streaks , whereas in reality, the outcome of your next trade has absolutely no relationship to the out come of the previous trade you took, its as random as a toss of a coin, even if you have a ‘holy grail’ trading strategy

    I hope these points add to the healthy debate-
    I don’t believe there to be one correct answer, but I’m willing to be persuaded!

  • Lew

    Absolutely! Preservation of capital is most important!

  • Gene B.

    The problem with 2% trades is that you will always be dealing in odd numbers and, thus, odd trading amounts. Even for the 10 loss streak, the difference between a $2000 and $1829 loss is not that significant and, to me, it is not worth the bother to keep track of the percentages.

  • Ivo

    Hi, I am more fan of 2% (or fixed %) strategy, but I must say, that Nial Fuller approach to prefer fixed money amount as a psychological help has something relevant inside. May be the fixed amount can work as a maximum of 2% value to bring a patiency to the trader. As well may be one should start with simple and disciplined 2% approach and may combine it with more agressive amount approach after getting the experience, when he/she knows, when it is possible to “load” the trade. But that may be a question of several years…

  • Edith Helwegen

    A good article about risk management. I always use 1% risk with each trade.