There are many people who can make money through trading, but it is not common to maintain stable profits because many people do not know how to manage their funds.
If trading is compared to a battlefield, then the trading system is the combat strategy, the method is the gun, and funds are the bullets. Then money management is the defensive strategy and one of the key factors to victory.
There are many ways to manage funds. Today, let’s learn about fixed position management and fixed amount management. What are they? Let’s use examples to understand their differences.
What are they?
Fixed position management: Regardless of the type of transaction, a fixed number of lots or ratio is used for each position opening. For example, 1 lot, 3 lots, or 5 lots are used for each position opening, or 5%, 10% of the principal is used for each position opening.
Fixed amount management: Regardless of the type of transaction, each transaction is limited to a fixed stop loss amount. For example, each stop loss is 1%-2% of the principal, or each stop loss is 500 US dollars, 1,000 US dollars, etc.
The difference between the two is that one is a fixed position purchase amount, and the other is a fixed stop loss risk amount.
2. Case Study
The definition may be a bit confusing, so let's use two examples to make it easier to understand their use and differences. This explanation uses the control variable method, which makes it easier to understand. Without further ado, let's get straight to the point!
Let's assume that the fixed position is 100,000 and the fixed amount stop loss is 10,000
Case 1: BYD 60-minute line long, stop loss is 7.65%, take profit is 16.76%
Fund management method: using fixed positions and fixed amounts
①Assuming that you use a fixed position method and buy 100,000 at a time,
Then the stop loss amount = 100000 × 7.65% = 7650 yuan,
Revenue = 100,000 × 16.76% = 16,760 yuan
② Fixed amount stop loss 10,000 yuan, position = 10,000 ÷ 7.65% = 130,718
Profit 130718×16.76%=21908 yuan.
Case 2: Kweichow Moutai 60-minute online long position
The fund management method is still: using fixed positions and fixed amounts
The fixed position is still to buy 100,000, stop loss amount = 100,000 × 4.19% = 4,190, and the profit is 100,000 × 6.53% = 6,530 yuan
The fixed amount stop loss is still 10,000 yuan, position = 10,000 ÷ 4.19% = 238,600, and the profit is 238,600 × 6.53% = 15,584 yuan
From these two cases we can find that:
For fixed position fund management, the amount of risk (stop loss amount) faced with different trading opportunities is different, sometimes large, sometimes small.
With fixed amount of funds management, the risk amount (stop loss amount) faced in the face of different trading opportunities is the same. Regardless of the opportunity, the risk is fixed each time.
3. Advantages and disadvantages analysis
The advantage of fixed position management is that it is easy to operate. You don't have to calculate the number of lots every time you open a position, and your positions won't fluctuate. You won't lose money with a large position and make money with a small position.
The disadvantage is that the loss will be greater when the stop loss space is large, and it cannot be dynamically adjusted according to market volatility and trading system performance, which may result in missing some good opportunities or taking excessive risks.
The advantage of fixed amount management is that it limits the stop loss of each transaction to the range you can bear, so that you will not suffer a big loss if you do not make mistakes. It can also be dynamically adjusted according to market volatility and trading system performance to improve yield and stability.
The disadvantage of fixed amount management is that the operation is complicated. It is necessary to calculate the number of lots based on the stop loss space every time a position is opened. It may also result in a small stop loss space and a large position, and a small stop loss is more likely to be stopped; a large stop loss space means a small position, which limits the position and also limits profits.
summary
Generally speaking, if your trading system has a high success rate and a low profit-loss ratio, or your stop loss space is relatively large, or you want to simplify the operation, then fixed position management may be more suitable for you.
If your trading system has a low success rate and a high profit-loss ratio, or your stop loss space is relatively small, or you want to adjust your position dynamically, then fixed amount management may be more suitable for you.
Whichever method you choose, the most important thing is to stay consistent, stick to your trading plan, control your risk, and don't over-leverage or over-trade.
To become a professional trader, you need to configure appropriate fund management to better control risks and make the system more effective. You cannot just look at the "fixed results" such as how much profit you made from trading. You also need to compare relative indicators such as profit-loss ratio, winning rate, risk-reward ratio, etc. to do better.
If you find it helpful, please like, collect it, and forward it to your friends. You can also follow [Paul High and Low Quant] and grow together on the road of trading!