Andrea Unger - The Successful Trader's Guide to Money Management

1 Cover

2 Title Page The Successful Trader's Guide to Money Management Proven Strategies, Applications, and Management Techniques Andrea Unger

3 Copyright This edition first published 2021 © 2021 John Wiley & Sons, Ltd Registered office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com . All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Wiley publishes in a variety of print and electronic formats and by print‐on‐demand. Some material included with standard print versions of this book may not be included in e‐books or in print‐on‐demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com . For more information about Wiley products, visit www.wiley.com . Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. It is sold on the understanding that the publisher is not engaged in rendering professional services and neither the publisher nor the author shall be liable for damages arising herefrom. If professional advice or other expert assistance is required, the services of a competent professional should be sought. Library of Congress Cataloging‐in‐Publication Data is Available ISBN 978‐1‐119‐79880‐4 (hardback) ISBN 978‐1‐119‐79882‐8 (ePub) ISBN 978‐1‐119‐79881‐1 (ePDF) Cover Design: Wiley Cover Image: © Andrea Unger

4 Dedication For the members of my family, who have always stood beside me and offered their support every day, also when taking the most difficult decisions.

5 Foreword

6 Preface

7 CHAPTER 1: Martingale and Anti‐Martingale1.1 The Right Stake 1.2 Martingale 1.3 Anti‐Martingale 1.4 More Examples 1.5 A Miraculous Technique? 1.6 Conclusions

8 CHAPTER 2: The Kelly Formula2.1 Kelly and Co. 2.2 Conclusions Reference

9 CHAPTER 3: A Banal Trading System 3.1 Analyzing a System Based on Moving Averages 3.2 Applying the Kelly Formula 3.3 Conclusions

10 CHAPTER 4: Money Management Models 4.1 The Fixed Fractional Method 4.2 Optimal f 4.3 Secure f 4.4 Fixed Ratio 4.5 Percent Volatility Model 4.6 Levels for Changing the Number of Contracts 4.7 Conclusions References

11 CHAPTER 5: Refining the Techniques5.1 The Importance of the Trader's Temperament 5.2 Reduced f 5.3 Aggressive Ratio 5.4 Asymmetric Ratio 5.5 Timid Bold Equity 5.6 Equity Curve Trading 5.7 z ‐Score 5.8 Conclusions References

12 CHAPTER 6: The Monte Carlo Simulation 6.1 Using the Monte Carlo Simulation 6.2 Maximum Loss 6.3 Conclusions

13 CHAPTER 7: The Work Plan7.1 Using a Work Plan 7.2 Conclusions

14 CHAPTER 8: Combining Forces 8.1 Using a Combination of Systems 8.2 Portfolio Money Management 8.3 Which Capital? 8.4 The Effects of Portfolio Money Management 8.5 Conclusions Reference

15 CHAPTER 9: Money Management When Trading Stocks 9.1 Trading in the Stock Market 9.2 Conclusions

16 CHAPTER 10: Portfolio Management 10.1 A Portfolio Approach 10.2 Some Improvements to the System 10.3 Conclusions

17 CHAPTER 11: Discretionary Trading11.1 Trading Criteria and Definition 11.2 An Example: Mediaset 11.3 Adjusting Volatility During the Trade 11.4 Trading Futures 11.5 Conclusions

18 CHAPTER 12: Questions and Answers

19 APPENDIX II.1 The Impact of a Trading System on Planning I.2 The Trading System

20 APPENDIX IIII.1 Understanding the Type of Strategy

21 APPENDIX IIIIII.1 The Advantages of Forex

22 APPENDIX IV: Online TradingIV.1 The Trader IV.2 Trading Profits IV.3 Systematic or Discretionary? IV.4 Choosing the Broker IV.5 Which Platform?

23 Index

24 End User License Agreement

1 Chapter 1 TABLE 1.1 TABLE 1.2 TABLE 1.3

2 Chapter 3TABLE 3.1

3 Chapter 4TABLE 4.1TABLE 4.2TABLE 4.3TABLE 4.4

4 Chapter 5TABLE 5.1TABLE 5.2TABLE 5.3

5 Chapter 6TABLE 6.1TABLE 6.2TABLE 6.3TABLE 6.4TABLE 6.5

6 Chapter 10TABLE 10.1 Summary of results.

7 Chapter 11TABLE 11.1TABLE 11.2TABLE 11.3

8 Appendix IITABLE AII.1 Results of the two systems with a percent f model set at 5.24%.

1 Chapter 1 FIGURE 1.1 Loss 1, win 1.25 – double bet after loss. Note how in the first 1... FIGURE 1.2 Loss 1, win 1.25 – multiply bet by 1.5 after loss. The final resu... FIGURE 1.3 Loss 1, win 1.25 – double stake after loss, a particular favourab... FIGURE 1.4 Loss 1, win 1.25 – multiply bet by 1.5 after loss, even increasin... FIGURE 1.5 Loss 1, win 1.25 – anti‐Martingale system. FIGURE 1.6 Loss 1, win 1.25 – anti‐Martingale system, results may appear exc... FIGURE 1.7 Loss 1, win 1.25 – 1,000 coin tosses slightly unbalanced in favou...FIGURE 1.8 Loss 1, win 1.25 – stake multiplied by 1.5 after a loss, with the...FIGURE 1.9 Loss 1, win 1.25 – anti‐Martingale system on the basis of unfavou...FIGURE 1.10 Loss 1, win 1.25 – stake multiplied by 1.5 after a loss. The sam...FIGURE 1.11 Loss 1, win 3 – anti‐Martingale system. The first 99 picks are u...FIGURE 1.12 Loss 1, win 3 – anti‐Martingale system. In this simulation, the ...FIGURE 1.13 Loss 1, win 1 – anti‐Martingale system. Winning the same amount ...FIGURE 1.14 Loss 1, win 1 – anti‐Martingale system. In this case, winning th...FIGURE 1.15 Loss 1, win 1.25 – anti‐Martingale system. The game is once agai...FIGURE 1.16 Loss 1, win 2 – anti‐Martingale system. Also, in this case, a wi...FIGURE 1.17 Loss 1, win 2.5 – as soon as a win pays out more than the loss, ...

2 Chapter 2FIGURE 2.1 Loss 1, win 1.25 – an extremely favourable situation for the gamb...FIGURE 2.2 Loss 1, win 1.5 – a win paid 1.5 times a loss. This really boosts...FIGURE 2.3 Loss 1, win 1.25 – results are below statistical balance (win % b...FIGURE 2.4 Loss 1, win 1.25 – the first 100 coin tosses show a balanced resu...FIGURE 2.5 Results after 99 unlucky picks and 999 balanced picks. The Kelly ...FIGURE 2.6 A balanced scenario after 999 picks confirms the Kelly formulaFIGURE 2.7 As in the previous case, the first 99 picks make a greater profit...

3 Chapter 3FIGURE 3.1 Example of the dynamics of the system used.FIGURE 3.2 Strategy report.FIGURE 3.3 Annual strategy results.FIGURE 3.4 Some trades with the strategy.FIGURE 3.5 Strategy equity curve.FIGURE 3.6 Comparison between performance with one contract and the Kelly fo...FIGURE 3.7 A comparison between the performance that can be obtained in the ...FIGURE 3.8 Comparison of different rounding off methods for the number of co...FIGURE 3.9 Peak equity values applying the Kelly formula.FIGURE 3.10 A half‐million‐dollar drawdown.FIGURE 3.11 The system with a smaller available capital.FIGURE 3.12 5,000 USD less is enough to make the technique that produced a r...