Money Managment problem

Hi

0 - I've read many of this forum's(risk and money management) threads. and i've to thank to all contributors.
i've used a tweaked martingale MM method(not the crazy double up on each loss ) for a while and i found that many of veteran traders who said: "Martingale MM followers are doomed to lose their whole account sooner or later; it's only a matter of time" are right. . actually martingale doesn't work because nothing is impossible in the market, even a 15 losing streak(consecutive loss). i've seen it with my two eyes that after 3 yrs, mkt proved me to be wrong in ASSUMING, a 15 losing streak is impossible with my precisely backtested strategy.
actually the problem of martingale method is: it assumes dependency between trades, and it's wrong to assume individual trades has any kind of dependency between em.

ok, this was story of losers. let's look for better ways of MM(=money management) which protects the capital in first place.

1- i have to use a Technical or anything else(astronomy maybe) etc ... tool to trade, which supposed to give me an edge in predicting which trades worth taking. then risk a tiny bit of account(say 1% of capital) on every trade(fixed fractional method). the problem is deciding abt n%.
as i read past posts, n% have to be calculated from the max DD(=Drag Down) in the past results in a considerable period. right?
monte carlo simulation is a way of deterimining this ratio right? could u pls provide a practical preferable free tool to do this simulation? or introduce me to formulas of this method to make me enable to apply them in an Excel of VB script.

this was first question of me(monte carlo practical resources for reading/applying it).

ok here's the next:

2- if we have a system with R = (No. Win / No. loss) and W = (Avg.Win / Avg.loss)
am i right in writing this:

E(efficiency of system) = R * W - 1

if we assume trading randomly(based on tossing a coin) in a random mkt with R:R = 1:1 ( say using T/P = 23 pip and S/L = 20 pip. on Eur with 3 pip spread), then E = 0.

am i right or not? this is my second question. i ask this because i've read some other calculations(say kelly's factor) which differs a bit with my calculation.
does E can give a hint to "what Fixed Fraction" (n%) to use?

3- my final question is: is it necessary to have positive Pips in the end of a period to make profit on that period?
i mean some MM gurus say: NO! absolutly not! u have to risk more on winning positions . ok true. but how could some1 know this special trade is going to be winning? it's kind of assumtion and i think it's not rational. some ppl say check ur trade's set-up with a higher TF(=Time Frame) and if it was in favor of higher TF trend, then risk more on it.
i mean is this all which is to Size management? to FEEL which trade is going to be winning and risk more on it?
am i right in saying that, with fixed fraction MM methods, 1 have to have positive pips(say in a month) to make profit on that month?

thnx in advance
i found this forum very valuable, but somehow forgotten . hope this questions could bring up some light and heat

( Re posted from another forum with permission from poster )

Amarnath,

Thanks for bringing up a discussion on the money management issue. It is so rare that someone wants to discuss this. Here are my thoughts, they may not be satisfactory but might give you one or two ideas.

1. When using a fixed fraction position sizing method, the way to decide on the n% is either using backtesting (by using few different n% values) and then deciding probably on one value based on the sort of drawdown you encounter.

OR

You could use the way I figured out the n%. I first decided on the n% value based on how much loss I could handle on a single trade without it effecting my emotional state adversely. This was important because I wanted to make sure I would take the next trade of my trading system without thinking too much about my previous trade. I started with an insignificant n% value so as to test out my system, gain confidence in the edge and also to get an estimate of the possible drawdown. The slowly increased the n% value but it still is low compared to what others suggest. The generally suggested value is 2%. I started with 0.25% and have currently moved to risk max 1% on a single position.

2. I totally agree with the idea that one has to risk more on winning position and less on a losing position. The way to do this is to initiate position in 5:3:2 ratio. Which means do not initiate your full position at once. Initiate only a part of it - say 50% of it on an entry signal. If the trade shows a loss and you get stopped out you have lost less because you did not initiate the full position. If the trade shows some profit after entry, enter another 30% at a pre-determined level. Now this level is important, you would have to arrive it based on backtesting your system. This would be the level at which you would have some confidence that the trade would not go bad once reaching this level (no gurantee but just greater probability). If it still continues to show further profit after the second addon then add the rest 20% at another pre-determined profit level. Now your full position is initiated. Now ride the position by trailing stops or other ways to push winning trades. This way you are risking more on winning positions and less on losing positions.

Too late now...got to get some sleep. I will post more later.

--SwingTrader

Hi swing trader,

Thanks a lot for reply and await more reply from you . Yes this forum have few MM gurus here . Good luck Good Trading

Thanks, Amarnath.

Here is a free Monte Carlo Simulation tool for trading systems from TickQuest. I use it extensively and like it, hope you find it useful too.

http://www.tickquest.com/product/equitymonaco.html

--SwingTrader

Hi,

Thanks for references and gr8 works .