Advanced capital management techniques

Because risk management consists of examining and measuring the effects of a position on the growth of a financial statement and identifying the extent and potential significance of failure, financial management outlines methods and a repeatable, structured approach to assessing the true dimensions of the portfolio. Creates under different conditions that act specifically. In this article, you will get acquainted with various financial management techniques

Risk management : Finding the right balance between very high risk and very low risk; In fact, high risk leads to a large decline or potentially leads to a sharp rise in stocks. Also, very low risk can be better controlled, but stock growth will be much slower.

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Risk management or risk control means that a trader must be aware of the amount of forces in the opposite position. In addition, risk management includes the development of guidelines on how to deal with trading failures, how to reduce risk, and how to set performance standards. Therefore, risk management determines the standards and guidelines in which the financial management method should be selected.

Capital management : Capital management explains the actual method of determining the order volume in specific circumstances. Capital management is like a screw that a trader can use to align with risk management goals and reduce the level of risk and optimize capital growth.

A trader should use different techniques of financial management and we will introduce you to the most famous techniques in addition to the basic models of fixed percentages and fixed assets:

The average upward  (Averaging up)

An upward average increases the probability of a winning position or evaluates the desired trade, meaning that a trade results in a profit when the trader considers more contracts for the existing position.

Advantages:

• The probability of a trade loss will be relatively low because the initial position is not large when following the upward average approach.
• In particular, trades that follow this method, the upside average approach can be beneficial because it allows the trader to increase the volume of the trade and strengthen its trend.

Disadvantages :

• Finding a reasonable price level to add to the trading volume can be challenging. In addition, when the price returns, the losers can quickly adjust the winners. To counter this effect, traders use larger positions (trading volume) in their previous orders, and when they start the upward average, they reduce the volume of their position, which is part of the argument of the proponents of this approach.

Average Value ( Cost Averaging )

This method is often referred to as “adding to losing positions” and is highly controversial among traders. This is the opposite of the upside because because when your trades move against you, you will open a new order to increase your trading volume.

Benefits :

• The losses are potentially reduced and even cause you to reach the breaking point of the trend sooner by opening a new position.

Disadvantages :

• Most amateur traders misuse this method when they are at a loss and cling to it emotionally (positioning, psychology). Such traders arbitrarily place new orders in the hope of making a profit, without any plans or principles for the price to eventually start to spin.

The average value method is not recommended for amateur traders or traders who have no control over this method or are emotionally involved in their trades.

Martingale ( Martingale )

The Martingale position volume approach is as controversial as the mean value method. Basically, after a loss in a trade, the trader doubles the volume of his trading position, immediately and potentially the previous losses are offset by the first profit.

Benefits :

• All previous losses can potentially be offset by just one winning deal.

Disadvantages :

• When doubling the volume of trading, risking for the whole account is inevitable. In the long run, all traders experience losses and intend to continue the negative position that leads to the loss of the trading account.
• If traders are willing to retaliate, they enter the trade after a loss. Martingale techniques present great challenges, and under such circumstances, the whole account is lost sooner.

There is only 1% risk for each trade, one trader in the eighth row of the table below loses the whole account.

Anti Martingale

Anti-Martingale

Anti-Martingale eliminates the dangers of the Martingale method. Unlike the martingale system, when a trader loses, he does not double the size of the account, but clings to the same position that the loss will not be remedied soon. On the other hand, when a trader makes a profit, he doubles the trading volume and faces twice the risk. Behind this approach, there is the idea that after winning a trade, you start trading with “free money”.

For example, a trader makes a profit of $ 200 in a trade where he risks 1% on a $ 10,000 account, now his new account volume is $ 10,200. In the next trade, he can drive on $ 200, which is a risk of 1.96% on $ 10,200. If his next trades are in the ratio of profit to risk 2, he has earned $ 400 profit and now his new account volume has reached $ 10,600. In the next trade, the trader can risk on $ 600, which is 5.7% of the risk on $ 10,600.

Benefits :

• With this method, the trader has the potential to earn more money with win records and his account balance will not easily fall below his initial account amount.

Disadvantages :

• Only one loss can destroy all previous gains. For this reason, traders should not double the trading volume, but use a factor smaller than 2 to determine the volume of their trading position after the profit. In this way, they will maintain their profit after the loss.
• Trading account volatility with the anti-martingle technique can be significant because losses after record profits can be high. If a trader can not cope with such losses, the anti-martingale method can create more problems. It is recommended that a trader set a certain level when he has not doubled the trading volume and return to the original approach and maintain their profits.

Attributed to a fixed ( Fixed Ratio )

The fixed ratio approach is based on a trader’s profit factor. Therefore, a trader must determine the amount of profit to allow him to increase the volume of the trading position (increasing the volume of the position is also known as delta).

For example, a trader can start a trade with just one contract and choose his delta for $ 2,000. Whenever a trader earns $ 2,000 in Delta profit, he can increase his position (trading volume) with a contract.

Benefits :

• In fact, it is only when the trader makes a profit that he can increase his trading volume.
• By choosing Delta, the trader can control the growth of his capital. More delta means that the trader is slowly increasing his trading volume. However, a lower delta means that the trader increases his trading volume after making a profit.

Disadvantages :

• The value of delta is very subjective, and delta regulation is more personal, not based on exact science.
• Because a higher delta reduces trading volume, the lower delta increases the position balance, and occurs when it moves from one profit margin to the next. The differences can be significant.

Kellys Criterion :

The purpose of the general criterion is to maximize the combined profit that can be obtained by reinvesting the profit.

Position size = Winrat – ( ۱- Winrate / RRR)

However, the volume of trades offered by the overall criterion often underestimates the impact of losses and record losses. Here are two examples that illustrate this point:

Example 1:

Position size = 55% – (۱ – ۵۵% / ۱٫۵)= ۲۵%

Example 2:

Position size = 60% – (۱- ۶۰% / ۱) = ۲۰%

As you can see, the volume of trades offered by the overall criterion is very high and risk management should monitor it more. To counter this effect, the common method is to use the general criterion fraction. For example, 1/10 of the overall criterion to 2.5%. 2% leads to the volume of the trading position.

Benefits :

• Maximizes growth rate.
• Provides a mathematical framework for the structural approach.

Disadvantages :

• The overall overall measure can lead to a very rapid significant reduction. The use of a comprehensive overall criterion fraction should be considered.

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