Definition of 'Money Management' vs. 'Risk Control'

Discussions about Money Management and Risk Control.
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christianh
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Definition of 'Money Management' vs. 'Risk Control'

Post by christianh » Sat Jul 24, 2004 10:51 am

I was always wondering, what the difference between 'Money Management' vs. 'Risk Control' is.

I don't see Money Management in the TradeStation sense as some type of stop loss scheme but as (in Tharp's definition) a form of 'Position Sizing', i.e. 'how much'.

But what is 'Risk Control'? Position sizing for ongoing trades?

Regards,
Christian

ksberg
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Many Definitions

Post by ksberg » Sat Jul 24, 2004 2:49 pm

Christian,

I think you'll find many definitions for money management, which is one reason Van Tharp used a different, more specific term "position sizing". You will also hear "bet size", or even allocation (which can also mean other things). Some traders use the term money management to imply use of stops. I don't consider stops themselves to be money management unless the placement of stops equate to the impact a loss would have on the portfolio. To do this you need to know size, so position size is related. In a certain senses, sizing and risk are related.

The definitions for risk control are also all over the map. There are some folks that have very precise meaning, such as value at risk models (VaR). It can also mean the risk units on a particular trade, or measures of portfolio heat, or adverse measures due to intermarket correlation, or "the black swan" type events (price shocks).

I use the term money management to infer the practice of all disciplines related to how money relates to trading. Then I will refer to specific disciplines within that umbrella to discuss or explore a given topic. That usually helps forward the conversation, rather than get stuck in "what do you mean by money management"?

TradeStation does not have any innate support for position sizing, but this can be coded in EasyLanguage. The TS stop loss measures are also not tied to equity impact, but again can be coded to support this in EasyLanguage. If these were supported, you might see some dialog with wording like "risk 2% of total equity on next trade, when stop is placed at 2.0 * average volatility from entry".

Here's a TS 2000i snippet you can use to tie in position sizing ...

Code: Select all

Input: AcctSize(100000), PcntEquity(0.01), ATRbars(20);
Variables: ATR(0), CON(0);

ATR = Average(TrueRange,ATRbars);
CON =(PcntEquity*(Acctsize + NetProfit))/(ATR*BigPointValue);

Buy("Long Entry") CON Contracts at Market;
Here's a TS 2000i snippet in the same file for regulating per-trade risk, assuming you had recorded 'EntryPrice'.

Code: Select all

ExitLong("2N Stop LX") EntryPrice - (2*ATR) stop
In these snippets, I have placed 2% of the equity at risk on the trade. I sized so that 1*ATR = 1% of equity, then placed the stop at 2*ATR = 2* 1% = 2%. So, I would expect to lose (roughly) 2% of the account value if the trade was not profitable.

You can see that this works much differently than native TS.

Cheers,

Kevin

christianh
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Post by christianh » Mon Jul 26, 2004 1:32 pm

Thank you Kevin for your thorough explanation.

Christian

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