Performance test of Money Management (MM) strategies

[eurotrader]

According to a recent article published on mql5.com titled ATC 2010: The Evolution of Expert Advisors in 2006-2008, the profitability of Expert Advisors has grown every year. One of the trends noted in the article is the growing use of Money Management strategies by Expert Advisors. Money Management (often abbreviated to MM) is essentially any method that adjusts the risk of each trade so as to maximize your long-term profits. In this article we demonstrate three MM strategies and their relative profitability. The strategies:

1. Fixed lot size: This is essentially the most basic strategy where the money risked in each trade is constant, thus decreasing overall risk as account balance increases. E.g., risk 1 lot in each trade.
2. Fixed risk: The strategy here is to keep your risk as a percentage of the account balance constant, thus increasing money risked as account balance increases. E.g., risk 5% of balance in each trade.
3. Fixed risk Martingale: Martingale is the classic method of doubling your bet after every loss in order to recover all losses and profit. We run this strategy with trade volume adjusted to account balance (as in strategy #2).

The tests are run from January 1st, 2008 to November 30, 2010 on the EURUSD pair, timeframe M15. The Expert Advisor used is the same for each test run and the initial account balance was 10,000 USD. Here are the results:

1. Fixed lot size (1 lot): 20,768 USD profit (+208%), 230 trades, -12% maximal drawdown
    
   
   
    
   
2. Fixed risk (10% risk): 1,598,648 USD profit (+15,986%), 230 trades, -27% maximal drawdown
    
   
   
    
   
3. Fixed risk Martingale (10% risk): 1,093,721 USD profit (+10,937%), 231 trades, -24.12% maximal drawdown
    
   
   
   Note: this strategy would have gone bust after about 137 trades but was saved by a risk-limiting routine in our code
    
   

In conclusion, a fixed risk strategy (#2) ensures significantly greater profits than a fixed lot size strategy (#1) and is less risky than the Martingale strategy (#3) which almost went bust. Performance of each of these strategies (and many others!) will vary based on the nature of the trading strategy itself, e.g., risk/reward ratio, win rate, etc. So happy testing!