A New Way Of Money Management - Trade Sequencing

Ok I'm super excited now. I just read an interesting money management strategy which I think has enormous potential. Here is the excerpt:


So during my Binary Options adventure, I started to use a money management system that initially was to overcome the negative R aspect of Binaries. Basically I compound in sequence of 3 or 4 - meaning i need to win 3 or 4 in a row!

But that's actually not that hard if you are patient and take only the best setups - mentally it's also easy as you know at the end of a 4 trade sequence you will have ~15R return.

This in turn helps with starting your sequence and not being over leveraged at the beginning, so you aren't risking too much of your trading capital to start. You just need to take the view that the accumulated profits mid sequence aren't your money yet until the end of the sequence.

Take a $5000 account - 2% risk per trade --> I do 2% per sequence so risk is $100 and I go for 1R trades only.

trade 1 - Risk $100 of trading account -> wins so I get $100 profit - 1R
trade 2 - Risk $100 of trading account + profit from last trade = $200 risk - wins $200 so total profits are now $300 - 3R profit on original $100
trade 3 - Risk $100 of trading account + profit from last trades = $400 risk - wins $400 so total profits are now $700 - 7R profit on original $100
trade 4 - Risk $100 of trading account + profit from last trades = $800 risk - wins $800 so total profits are now $1500 - 15R profit on original $100

after the 3rd trade you have a cumulative R of 7 and after the 4th a cumulative R of 15. How often can you pick a swing big enough to return 7 or 15R? compared to picking small 1R hops?

Conservative Trading - Aggressive Money Mangement. 

The above helped my psyche enormously. It still takes skill, but it makes you avoid taking marginal setups and waiting for the really good ones, because you know the pay off at the end will be worth it. That's how I nailed my discipline. Also, because the payoff is so good, but reliant on my trades running to target - i just let em run. It's also far easier to take the small 1R hops, than to find those 10R swings.

What happens if you lose on the 4th trade? well you only lose $100 of your initial capital - the rest was 'house' money and the potential return was worth it  You only need to pull of 1 x 4 sequence trade to fund another 15 attempts!

You can start of by just doing 2 at a time for a cumulative R of 3 - most people would be happy with a 3R trade 

I always thought if doubling down on losing trades was really bad - then the opposite must be true if you double up on winners! and it is!

OK actually I came across it somewhere else last week but couldn't understand it. In fact I think my understanding of it now is probably only half baked, but I can definitely see the tremendous potential in it. In short, the strategy involves adding the profit from individual trades to the risk amount. My initial thought when I came across it last week was that it is pointless because I could win 3 times in a row and  if on my 4th trade I lost, all the accumulated profits would be gone. What I didn't realize was that if I blew up one sequence, the most I could lose was 1R, but if I pulled off a sequence of 4 successfully, my accumulated profits would be 15R! Like what the excerpt mentioned, I only need to pull off one sequence to fund another 15 attempts!

Mind blowing fact: If a damn good scalper is able to be very picky and he is able to nail 2R per trade consecutively for a sequence of 4 (meaning 4 consecutive wins of 2R each), he would have more than doubled his account (260% increase). FREAKING UNBELIEVABLY AWESOME RIGHT?! In other words, all this scalper needs to do is to keep trying until he pulls off a successful sequence, and bingo 260% increase on his account. Each failed sequence would only cost 1R so the downside is limited.

Ok now here are my thoughts towards it. First of all, this management strategy is only for veterans. I'm talking years of experience in trading. Why so? Because the key to it is a very very high win rate, like 80-90+%. Well I suppose a low win rate with high win amount would also work, but that would require a tremendous (almost robotic) amount of patience and faith as it could be ages before one pulls off a successful sequence. This management strategy also requires a huge amount of discipline and mental strength. One might not be comfortable with an insanely large trade size on the 3rd or 4th sequence. He might also be tempted to take profits too early because the profit amount then is very huge and is not something he is used to seeing.

I will not try it on my live account because I've not proven my consistency and I know that I do not have the mental tenacity and patience yet. However it is definitely something I'll look into in future, and quite possibly is the Holy Grail to exponential account growth.