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(More customer reviews)Thank you to John T. Morris for buying "A Trader's Money Management System" book and for reading it. And, though his review was less than glowing, I appreciate his comments here on Amazon.com because it opens up a valuable dialogue for traders about "effective" money management.
In response to his comments, let's just say I'm the first to admire the work of Douglas, Elder and Tharp -- and encourage anyone not familiar with their work to study them. My concern for Morris is that he makes no mention of Nauzer Balsara or Ralph Vince -- arguably the two greatest mathematicians in the field of trading. These men are mentioned in my book because their timeless concepts (both wrote books over 15 years ago) are the basis for truly "effective" money management.
With that said, many will agree that Balsara and Vince, while they are pure genius, can be at times difficult to comprehend for the new trader -- and even for some very seasoned traders. What "A Trader's Money Management System" does for the reader, is to make some of these complex concepts -- like using the risk-of-ruin tables and optimal f formulas -- easy to understand and instantly implement.
Apparently my simplicity in the book has worked since Morris says in his review that "...I do give this book two stars rather than one because it does contain some ideas that I have never run across before in my study of trading: The Risk of Ruin concept plus optimal percentage formula to determine the amount of equity capital to be risked on any one trade...".
If he has gained that insight from the book, then he is one step closer to developing more "effective" money management. The next big step for him would be to realize that there is no "magic percent" to risk on each trade. The 2% figure is purely an example and a frame of reference for the reader and that is why there is an "Important Note" stated when ever the 2% figure is mentioned. The important note directs the reader to Chapter 9 so that they can use the risk of ruin tables and optimal f formulas to calculate the exact amount that should be risked on each trade.
When Morris states that "...except in very exceptional cases, 2% is way too much to risk on a trade and that it should be more like half at most..." he is not basing his analysis on any mathematical probabilities. Instead, it's more of a hunch, since he's taking numbers out of a hat from interviews in the Market Wizards book. He doesn't know what the pay off ratios or win ratios for the traders interviewed were.
By looking at page number 79 in "A Trader's Money Management System" you'll see that my recommendation for a trader producing a win ratio of 35% (meaning you are winning only 35% of your trades) and a payoff ratio of 2 to 1 (meaning for every dollar you lose you earn 2 dollars) -- they should be risking only 1% . Where as on the same page of the book you'll see that if you have a win ratio of 50% and a payoff ratio of 3 to 1 you would in fact be able to risk 10%.
Why can one trader risk only 1% and another risk as much as 10%? It is simple, from a mathematical probability, their historical performance warrants -- less risk -- OR -- more risk -- depending on how well they trade.
I've been working with traders for over ten years and have to say that my passion is trading and education. Hopefully this response to John T. Morris will give other traders, if not Morris himself, some insight into effective ways to structure their risk -- depending on what their current trading results are telling them through their win ratio and payoff ratio.
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