Megadroid Money Management – How I do it
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.
Thanks for your interesting site. You seem to have a very high amount of money on your broker accounts 🙂 I don´t see that you mention the risklevel setting in the Megadroid EA. Is that not important in your money management?
I´m on my way to start with $1000 on IBFX (megadroid EA). Is that to small deposit? I was prepared to take a 10% risk in every trade. Am I correct that 100pip is $100 in money in my example? I was planning to use the EA to scale the lot size according to the balance.
Kind regards /Linus
Hi Linus,
The “risk settings” on Megadroid are a little bit arbitrary. On a 1kUSD account, with a “10% risk setting”, Megadroid would probably trade a lot size of about 15k EUR/USD. That’s $1.50 per pip.
As I mentioned, most of the larger losses are around the 50-60 pip mark. So that would be a $75 to $90 loss or 7.5 to 9%. I guess that’s close to 10%. However I do my risk assessment based on a 120 pip loss because that has happened to me on one occasion before. So on a 1kUSD account with “10%” risk setting that would mean 120 x 1.5 = $180 or 18% loss.
I can’t offer specific advice, but if I were planning to trade with that setup, I’d ask myself whether I was comfortable with that sort of downside risk. $180 might not be much for some people, but for others it’s a lot of money. It depends on your own financial situation I guess.
Hope that helps
Many thanks for your reply, then a 5% risk setting feels a bit safer to start with.
Megadroid uses a variable stop loss. It runs between 50 and 150 pips. This can be seen by running a simple backtest with the Stealth Mode off. Most of Megadroids losses have been in the 50 pip range, but the larger loss is always possible. Add to that Aggressive Mode and Recovery Mode, if you use them, and this is the real risk.
Their risk control is just a fixed percentage of the free margin and unfortunately doesnt take the stop setting into account. This leaves great varriance in the real risk, should things turn bad.
You’re absolutely correct Ken.
That “risk” setting by no means defines the maximum risk. Apparently the actual stop loss is based on the size of various candles, and elapsed trade time. I’m not across all the specifics, but it can vary a lot depending on these factors.
We’ve also had numerous instances in the past when both the aggressive and nonaggressive trades got stopped out on the same day.
My approach is to trade fixed lots (aggressive on recovery off), and assume a 120 pip loss is the probable worse case scenario, although it could potentially exceed that. I adjust the lot size to a level where I can deal with that sort of $ loss drawdown.
Hello
Bravo for this job.
I started a test on Monday and I had a first position opened on Wednesday at about 23 h GMT, benefit 11.2 pips
with TADAWULFX with a fixed spread of 2p
A+