Money management is a key component of success in trading. While a trading strategy (rules for entry and exit) dictates what a trader does, money management determines the consequences of those actions.
Today, I’ll introduce you to the concept of the Hybrid Lot – an innovative approach to lot calculation that combines the best of traditional methods and has the potential to enhance any trading system.
Classic Lot Calculation Methods
Before we dive into the Hybrid Lot, let’s take a look at the two main lot calculation methods widely used by traders.
- Fixed Lot
This involves trading a fixed amount regardless of changes in the deposit size.
The main advantage is that it’s easier to recover from losses. By ignoring the decrease in deposit size, you continue trading with the same lot, allowing you to recover faster. For example, after a 50% loss, earning 50% of the initial deposit is enough to break even.
The main disadvantage is the missed opportunity from compounding interest. Profits don’t affect the lot size, limiting growth potential. An additional 10% profit always yields just 10% of the initial deposit, no more. - Dynamic Lot
The lot is calculated as a percentage of the current deposit, taking into account all profits and losses.
The main advantage is the power of compounding interest. As the deposit grows, so does the lot size, allowing for exponential capital growth. As M. Rothschild once noted, “Compound interest is the eighth wonder of the world.”
The main disadvantage is that recovering from losses is harder. As the deposit shrinks, the lot size decreases, making the recovery process longer. For example, after a 33% loss, you need to earn 50% of the remaining deposit, while a 50% loss requires 100% profit to break even.
If you think these two approaches can be “married,” you’re right! More precisely, it’s their advantages that can be combined.
Introducing: The Hybrid Lot.
The Hybrid Lot is an innovative money management approach that combines the best of fixed and dynamic lots while eliminating their main weaknesses.
How does it work?
- Losses are ignored in the lot calculation (like in the fixed method). You continue trading based on the initial deposit without reducing the lot size after losses, allowing you to recover faster.
- Profits are accounted for to increase the lot size (like in the dynamic method). When profits are earned, the lot size increases proportionally to the deposit’s growth, utilizing the effect of compound interest.
Why is it effective?
We avoid increasing risks after losses, which protects us from deep drawdowns, while still maximizing profitable periods for capital growth.
Important! Compound interest is only applied when the peak of profitability is exceeded, not during small profits in a drawdown. Once a new peak is reached, you trade with the new deposit size. If losses occur, and small profits follow, you continue trading with the fixed amount until the previous peak is surpassed!
This trick is incredibly effective in the long run. Try it!
