Trading is all about probability and risk management. The first step is finding a strategy that gives you a statistical edge. The second part is all about “money management” i.e. leveraging your trades in a consistent, sensible manner, making sure the downside is tolerable, while at the same time achieving an acceptable growth potential. The same two principles apply to any form of investing.
Trading with a robot like Megadroid takes care of many elements of money management automatically. All the trades have a consistent risk:reward ratio, and the amount risked per trades can be customised. The only job left is to decide how to adjust the Megadroid money management parameters.
So what are the Megadroid Money Management options?
There are 2 ways to set it up.
- Trade a fixed lot size for every trade.
- Automatically scale the lot size according to the MT4 account balance
Protecting the downside!
Whenever I invest money into a trading strategy or any other form of investment or business, the first question I ask myself is how much am I willing to risk in dollar terms. This will depend on your own unique circumstances. My approach is to estimate my net monthly income from all sources and then assign a certain percentage of that as “risked capital”. Once I know the amount I’m prepared to risk, I then calculate the size of the lot size I should trade.
What’s a worse case loss scenario for Megadroid?
It’s a difficult question because nothing is 100% with trading. All I can go on is past performance, and assume that Megadroid will perform roughly the same over the next 12 months or so.
From my past experience trading this robot, the significant losses are usually in the 50 to 60 pip range, and occur on average once every 1 to 3 months. Even when they do occur, their impact is often diminished by 30 to 60 pips of profit trades in the same month. The worst month I’ve had was July 2009. Megadroid landed 2 consecutive losses totalling 120 pips! It took about 1-2 months to recover from that. So, for the sake of my calculations I use 120 pips as the probable worse case scenario.
Calculating my lots size
Lets say I was prepared to risk $2000 USD trading Megadroid per month. Given the probable worse case loss is about 120 pips, I should be trading roughly $17 / pip (i.e. $2000 / 120 = 16.67 = approx $17/pip). So I’d trade a total of a 170k lot EUR/USD on this strategy. What I’d do is split the 170k lot across 2 or 3 of my best performing Megadroid accounts to further optimise my returns. So in this example I might trade 60k lot at GO Markets, 60k lot at Alpari UK, and 50k lot at Interbank Fx. You can see what accounts are doing well from my results section.
Should I use fixed lots or automatically scale them?
For me, it doesn’t matter which method I choose so long as the total lots I’m trading doesn’t exceed the lot size I calculated (170k lot in the previous example).
With the lot-scaling method, Megadroid will automatically increase the lot size as the account balance grows. If the lots size has scaled up significantly, I recalculate the total amount I’m risking and decide whether that risk is acceptable or not.
Always being aware of the risk is important, and then when the inevitable large loss occurs, you’re prepared rather than surprised.