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The Money Management Trick For Huge Low-Risk Winners

Coming from a Poker background, I have seen a lot of other gambling businesses as well, apart from trading: sports betting, prop betting, roulette and all the other casino games that you play versus the house, and so on. They all play very differently, yet they have one thing in common: an existing edge can be magnified or even sustained by creative money management techniques, but an edge can not be developed by employing money management techniques. So if you are not a profitable trader yet, consider this article food for thought, but don’t try this at home.

Especially in sports betting, I have seen countless people testing hundreds of different money management techniques, including the infamous martingale, among others. In Poker, the rule of thumb was to always play with no less than 20 stacks for a limit (in other words, never risk more than 5% of your bankroll on a single game). So if you wanted to play Texas No Limit Hold’Em with a buy-in of 200$, you had to have at least 4000$. In Forex, we have the luxury of always betting exactly x% of our bankroll. In Futures, due to set contract values, we do not have this luxury, but we can come close to it depending on the size of our bankroll. Most people think that betting 5% on any one individual trade is insane. Well, let me tell you that it is insane to not even think about the possibility of going beyond 1% or 2% risk per trade. It can be done, very profitably.

It has always been hard for me to follow rules and systems over a long period of time. I need to mix things up, or I will become dull, and start making grave mistakes. But system hopping, as we all know, is detrimental to a trader. So where can I get my excitement? Yes, by gambling it up – not with my own money, but with money I won (this is actually a psychological trick and makes no sense mathematically, but it IS mathematically safe and it works wonders for the brain).

I got this idea from a professional sports better who would bet, let’s say, 50$ on a 3:1 bet. If he won it, he would win 100$ plus get his 50$ invested dollars back. He would then take his initial 50$ out and bet 100$ on the next bet (and ALWAYS take 3:1 odds if he could get them, or there was no bet). If he won that, he would now have 300$. Now he would divide those 300$ by two, and bet 150$ on the next bet. If he won that, he would now have 450$, divide that by two, and so on. He would do this until he lost a bet and then begin anew from 50$. He would ONLY lose his initial investment of 50$ if he lost the first bet. After that, he would always earn money if successive bets were winners. Additionally, if he won only two bets in a row (the first and the second one), he would now have 50$ (initial investment) + 150$ = 4 more tries of stringing together another two or more winning bets. And if he went on a streak, he would make several 100% ROI from a single run of bets. Sounds exciting? I think so. He was, in fact, the only profitable sports better I ever met (I am not exactly sure about his win rate, though).

How is this applicable to trading? As we cannot have a fixed Reward:Risk Ratio (RRR), or at least it doesn’t make sense, I had to alter his strategy a bit. I have a certain level of R-Multiple (what is R-Multiple?) I would like to reach per week so I can pay my bills and grow my account simultaneously. Let’s say, my stats show that I average 5R per week, that’s 20R a month. Let’s also assume, that my bankroll is big enough that I only need 2R per week, or 8R per month, to live of off, so I can comfortably grow my account while also accounting for volatility (which also depends a lot on win rate). But of course, I do not stop trading after reaching 5R per week. I have a stop loss to protect my downside, but I ride the hell out of an upswing as long as I can. In some weeks I can make 10R, once or twice a year even 15R.

Now when a new week begins, let’s say I have an overflow of 5R from last week. I take out the 2R for this week which I need to cover my costs, and am left with 3R. Guess what? I bet it all on the next trade. This is 3 times my usual bet size. I have gone up as high as 10 times my usual bet size. This is fun and exciting for me, and I know I have my bills covered, plus I am on an upswing at the moment and clearly in sync with the market – so it’s worth taking a shot (moving up in limits while undercapitalized in Poker is called taking a shot, by the way). If I lose it, I go back to grinding my usual bet size, sure it hurts a little, but it’s ok – it’s money I don’t need and it’s not like I gambled it away on something where I do not have an edge, this is the only thing that ever really hurts me in gambling. If I win it, I take half out, and bet that again, and so on. As I never go below a RRR of 1:1 for my trades, but usually more, if I win the first trade, I already doubled my initial “gambling stack” as I like to call it, and can then take it from there. I repeat this until I lose a bet, and then go back to grinding my usual size.

Doing it this way, I had ridiculous up spikes in my bankroll while not a single crazy down spike. Sure, when we come to bet 5 or 6 and the amount of money starts to become 10 times my usual bet size, losing that one, that stings. But on the other hand, I made a truckload of money before that, you just gotta keep pushing until that inevitable loss comes around. If you do not need to take out money to cover your costs, you are in an even better position, as your initial gambling stack will be bigger.

I highly recommend – if you are consistently profitable – to take a look at your average R-multiple per week, and your expected volatility, and then to decide on a weekly threshold above which you take out money to put into your gambling stack for a bit of (potentially very profitable) fun. The less volatile your performance is, the better. If you make 20R in one week, and lose 16 in the next, you average 2R per week, but that doesn’t mean you should gamble with 18R after a 20R winning week. If, as a daytrader, you consistenly rake in positive R per week, you are in a perfect position to add some positive variance to your portfolio. For longer term traders, I would suppose going for monthly instead of weekly averages. You can even go for daily averages, it is up to you.

The important thing is, that you are basically playing with “free” money, or “won” money, which makes you SO much more relaxed when taking the next trade that your chances of winning that one initial trade and then building up a streak are quite good.

Money won is twice as sweet as money earned. – Fast Eddie Felson

Additionally, you can mix it up once in a while and “reward” yourself with some gambling fun after having a good week. This strategy also motivates the hell out of me, as I want to have as much money as possible in my gambling stack for the next week so I can tell insane stories of gigantic bets to my grandchildren. This one strategy has helped me tremendously in boosting my bankroll and also sticking to my core strategy much easier, as I know, the excitement will come as soon as my gambling stack is big enough, which will only happen if I can be diligent enough to follow my strategy in the first place.

I have a few other “experiments” running at the moment going far beyond what is considered to be conventional and sound risk management, as I am always interested in pushing things just a bit further. The important thing is: never gamble with money you need. Only play with “free” money. And keep your initial risk small, and then ramp it up – anti-martingale or something like that.

What do you think about this idea – absolutely insane, or interesting? Are you interested in my other money management ideas? Let me know in the comments below!

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24 comments

  1. Hey Moritz,

    Love your idea of gambling and that can only happen when you can diligently follow your strategy. The gambling you subsequently take on is practically no risk, lol…while spicing up the trading process. Lots of fun!

    Cheers,
    MJ

    • Hello Moritz,

      I think that this approach, sometimes betting big, along with adding to the winners – are the only way to “win” in trading.

      Thanks

      • Hi Sultan,

        probably not the only ways, but dynamic position sizing is one of the things that can really turn a mediocre into a stellar performance.

        M

    • Hey MJT,

      yes spicing it up sometimes is something i really need. I guess i am not a perfect personality for being a trader but i have learned to turn my vices into virtues instead of trying to change myself (which would never work).

      Moritz

  2. 20R per month? Seriously? this way you can make 40% profit per month using only 2% risk per trade and you would never need to do gambling money management strategies!!! thats over 5000% ROI.
    Don’t get me wrong I’m a fan of using markets money on a winning streak, but 20R per month you are the most profitable fund manager in the world 😉

  3. Hi Moritz

    Interesting article. I love to push the envelope. One of my successful trading strategies is staggered buying/selling which can be scary, but incredibly profitable using certain indicators.

    Thanks again

  4. Hi Moritz,

    Can you please throw some light on EMA’s. I actually wanted to know what it signifies? What the movement of EMA line up and down tells us?

    Also it would be a great favour from you if you share your knowledge on candlestick bar. I donot want to know basic but i want to know how to read them. How to place entry and exit orders?

    Thanks in advance.
    Andy

  5. hi Moritz, I also came to the markets after playing some roulette/baccarat/sports betting, and I use something similar that you might have come across in your past, and is similar to what you describe above. It’s called a Guetting progression – basically, increasing your bet sizes as you get on a winning run, lowering betsizes after a loss or 2, and keeping bet sizes small until the winning streak appears – it’s great, I can sometimes ending up betting 6 or 7 times my initial betsize, but only after winning a sizeable sum. I was happy to see someone else with a similar style =, cheers

  6. Definitely NOT Insane for sure!
    I think it’s Very Fun & will keep you up always with that Oomph factor in it 🙂
    OBVIOUSLY AS EXPLAINED THE MONEY MANAGMENT HAS TO EB TAKEN CARE OF PROPERLY.

  7. CAN YOU THROW SOME LIGHT ON BINARY OPTIONS STRATEGIES?
    or
    If you people don’t do it, can you guide to some good resource/resources?
    Thanks in Advance!

  8. Hello,

    I always try to mechanically follow a risk : reward ratio, but that was an interesting read and it opened my eyes to new strategies. There have been times that I wanted to follow a money management routine like that, but I felt it would cause me to revert back to a time when I had no money mgmt. strategy. However, I can see the value in this and if the markets are moving in sync with your strategy I can see this creatively adding to larger gains to your account. Fun and interesting. Now, I need to get the right week to try it.

    Thanks for the information.

  9. Great article. Funny thing, I was meeting (live) with a local trade group, and a very similar method was being employed by a successful Options trader.
    The idea hits right at the main issue most (imho) traders have, fear of losing.
    Thanks for sharing.

    • Hello Darryl. When you see that 99% of all people who start trading fail and most follow all the same advice, it becomes obvious that ‘common wisdom’ should be avoided at all costs 🙂

      Rolf

  10. Hi Moritz,

    Great article.
    I actually employ a similar MM strategy full time. After years of having a big account with low leverage and small risks, and getting nowhere, I now use a strategy whereby I do the exact opposite and am very happy with the results.
    I start with a very small account, high leverage and 100% risk. I look to triple up and restart the whole process after 3 consecutive winning trades. Every week I pay myself whatever profits there are and start the new week on the same small account.
    I find this works well for me as psychologically I don’t take any big hits and after 3 consecutive winning trades I have 60 “small accounts” paid for.
    Keep up the good work.

    • Miguel, interesting approach, thanks for sharing! Yes, a lot can be done with money management to help us both financially and psychologically…all with the premise that we are profitable in the first place, of course.

      Moritz

  11. dear friend moritz,

    is this applicable for all type of trader like intraday, swing and specially for options what i trade in indian stock market .

    • Hey Kishor,

      I’d say it applies to any form of gambling, just in different kind of ways depending on how much leverage you can get, for example. I don’t know near enough about options to answer your question as I have never traded them, but I am sure whenever you bet money on something, you can get a little “creative” with money management, or rather, you should!

      Bests,
      Moritz

  12. I think I understand it but it would make a lot of sense for me (and probably others not that experienced yet either) to see it with an example.

    For example, if we start out with a $200 account and our R is 10/MONTH minus 4 for living expenses. Now what? I’m a bit confused. Then again, I’ve might played around too long with bollinger bands this morning.

    • Hey Diederik, I do not recommend living on a 200$ trading account :O, not even in a bamboo hut on Papua New Guinea. Gotta be realistic in this game, but also be able to give it a (realistic) shot.

      M

  13. Hi Moritz,

    If I earn an average of 10R per month, and I want to bet half of it on the next month (5R).
    And if I average 20 trades per month, do I bet 6R per trade position or 1.25R per position?

    Thanks,
    Reynor

    • Hi Reynor,

      as always it is up to your risk appetite. What do you need for a living, what are your goals, what can you handle psychologically. I don’t mind betting 5R on a trade if last month I had a huge upswing. While we can’t forget that upswings are positive variance and we need to protect ourselves when experiencing downswings, betting more when you run good and betting less when you run shit is a money management technique as old as gambling :). Poker players do it all the time, it’s called taking shots.

      Bests,
      M

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