Money-management

3 Versions of Loss Compensation System (LCS)

Money management for Fixed Time trading

Loss compensation system (LCS) is a set of rules for managing a trader’s capital. You can use it to close trading sessions in the positive zone even if the number of your profitable trades is small.

The main principle of the system is to increase the investment amount after a losing trade. If the next trade closes with profit, its amount will make up for the negative result or a part of it.

There are many types of LCSs. Let’s consider 3 basic options:

 Conservative The maximum multiplication factor is used. The correlation of profitable and losing trades is what affects the final profit. Moderate A trader increases the investment amount to make up for the drawdown and make some profit. It’s considered to be the best option. Aggressive After making a losing trade, a trader greatly increases the amount of the next one. This method can help one make a huge profit on short notice. However, it can also lessen one’s deposit in case of a series of losing trades.

Conservative LCS

This approach implies that if you have made a losing trade you should double the amount of the next one. Here is an example of the use of the conservative version of LCS with a starting amount of \$1 and a yield of 90%.

 Step Trade amount In case of a losing trade the total result will be Potential profit 1 1 -1 0,9 2 2 -3 1,8 3 4 -7 3,6 4 8 -15 7,2 5 16 -31 14,4 6 32 -63 28,8 7 64 -127 57,6 8 128 -255 115,2

As you can see, you can make 8 trades using the conservative LCS with \$255. If you make a successful trade at the eighth attempt, the total result will be -\$11.8 (profit from Trade 8 minus the total negative result fixed at Step 7: 115,2 — 127 = -11,8).

We recommend that you use this LCS model if your strategy doesn’t imply more than 3 loss-making signals in a row. In this case, this strategy will even bring a regular income.

Moderate LCS

This strategy is the most popular one, as it brings profit after a successful completion of any losing series, regardless of the step of the LCS. To use it, multiply the investment amount by 2.5 after you’ve got a negative result.

Here is an example of the use of the moderate version of LCS with a starting amount of \$1 and a yield of 90%.

 Step Trade amount In case of a losing trade the total result will be Potential profit 1 1,0 -1,0 0,9 2 2,5 -3,5 2,3 3 6,3 -9,8 5,6 4 15,6 -25,4 14,1 5 39,1 -64,4 35,2 6 97,7 -162,1 87,9 7 244,1 -406,2 219,7 8 610,4 -1016,6 549,3

If you need a minimum of \$255 to take 8 steps using the conservative LCS, the deposit requirements for a moderate approach are up to \$1016.6. However, if you make 3 series of trades with 4 losing ones and 1 profitable trade (the final one), the profit will amount to \$29.4.

You will get this result if you make 12 losing trades and just three successful ones.

Aggressive LCS

Aggressive approach involves a significant risk and can be recommended only to those traders who take their deposit drawdown in cold blood. At the same time, this option is well suited for those who is eager to earn fast.

When using an aggressive LCS, increase your next trade’s amount threefold. Here is an example of the use of the aggressive version of LCS with a starting amount of \$1 and a yield of 90%.

 Step Trade amount In case of a losing trade the total result will be Potential profit 1 1,0 -1,0 0,9 2 3,0 -4,0 2,7 3 9,0 -13,0 8,1 4 27,0 -40,0 24,3 5 81,0 -121,0 72,9 6 243,0 -364,0 218,7 7 729,0 -1093,0 656,1 8 2187,0 -3280,0 1968,3

Let’s say a trader has made 5 series of trades, and every sixth one was profitable. In this case, the trader will get \$488.5, which is almost 15% of \$3280the amount one needs to take 8 steps using the aggressive LCS.

General tips

1. Make sure you calculate the potential risk before you start a trading session.

2. If you are trading assets with the return of 70-80% you may slightly increase the LCS rate.

3. Combine the use of LCS with a trading strategy.

Related posts

Kagi chart

Gráfico Kagi (Jap. か ぎ 足) - usado na análise técnica do gráfico atual de preços do ativo, que exibe a direção da mudança de preço na forma de uma série de linhas verticais de difer...

What can “paper trading” teach you?

“Paper trading” has always been an alternative to using a demo account. In this article, you will find out why people are only getting more interested in this method of training.