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Money Management

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1 Money Management on Wed Jul 20, 2011 9:26 am

Mikey

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OK, inspired by pk's posts over at FF about the % risk/reward ratio, it occurred to me that I haven't spent anywhere near enough time on my MM skills.


So, based on a reasonably simple AB=CD trade, I would like opinions on the following:

Let's say account balance is $10K.
4hr AB=CD to the downside is in play, with bearish HD.
A = 4369, B = 3834 and C = 4282


Fibo retracement levels are:
38.2 = 4036
50 = 4100
61.8 = 4163
78.4 = 4250


Now assuming I am happy to scale-in, my first entry would be at 4036. I would then add additional entries at 4100, 4163 and 4250. Let's say these positions arer worth $1/pip.

My stop loss sits at the point where the AB=CD becomes invalidated, (4369).

If this trade fails, the total loss in pips would be 927; = $927 or 9.27% of account.


The FE100 sits at 3750.
If the trade succeeds, the total profit in pips would be 1549 = $1549 or 15.49% of account.

I realise that this kind of trade is over leveraged, but does this methodology stand up to closer scrutiny?
The r/r for such a trade would be in the region of 1:1.5 which doesn't sound great considering I often read of risk/rewards of better than 1:5

This then poses the question of whether to avoid entries based on the 38.2 and 78.4 retracement levels. Or to make the position sizes different for each entry. Or to take profit on any initial bounce off these levels and re-enter on the re-test.

Would be very interested in having this discussion.

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