Hello, I am opening this thread to share with you the requirements I seek when I choose a money manager. Also, I will need you to add your opinion as there are a lot of requirements that are important for you compared to mine or I simply missed them.

Before I start, just a quick note. I am a money manager myself but I am not here to promote myself as I don't accept any more funds. I am just here to watch others' performance.

I am a fan of Black Swan [Ref: "Black Swan" "Fooled by randomness" for Nassim Taleb] If you haven't read these books you should do it right now. Black Swan is one or the rare books that changed the way I see the markets. I have spent 1 year testing/experimenting with the theory of randomness. I am telling you this because I refer to that book too much.

OK, Let's start. First, anybody can generate good profits in Forex. You simply need to know how to click on your mouse and enter a position to generate profits. It's a 50/50 chance to win or to loose. It is like flipping a coin. Head 50% and Tail 50%. From that comes my first rule: I only choose performances that have over 1 year of profitable data

Next, "I am not so much concerned with the return ON capital as I am with the return OF capital" Will Rogers

I totally agree with this, I cannot risk all my capital (100%) in order to get 10% per month.

Every time I meet with new people, I am asked the same question when I tell them what I do for a living. It's more a statement than a question as they are already convinced and most of them won't wait for my answer. They state that trading Forex is very risky.

I tried a lot to convince them that it really depends on the way you trade it. But, they already heard a lot about people getting broke, selling their homes and assets. Usually this is my answer: I ask him: "If I told you to jump from the first floor, would you do it?" Answer is always :"No" I continue:" Now if I tell you, I'll give you 1 million $ if you jump, would you do it?" Typical answer is hesitation. Some would volunteer to jump from the 2nd floor :)

Got the point?

No? I will explain.

Risk relative and not absolute. (at least this is how I see it) Risk is the ratio between loss and potential gain. Let's take an example: If I am risking 10% of my account for a 5% potential gain, I am risking too much. If I am risking 90% of my account but I have the potential to gain 1,000%. Risk here is very low. In other terms, if I am risking to brake my leg by jumping from the first floor. I am stupid! BUT, If I am risking to break my leg to gain 1 million $. My risk here is almost non-existent. I would do it and I am sure you would do it too.

To sum-up, I will need to look at the Drowdawn and compare it to the average profit per month. If the ratio is acceptable to the kind of risk I can accept, I will move on to see if this same ratio is conserved for each individual month over all the period studied.

Next step: diversification! George Sorros says that diversification is for cowards but I do not agree with him. If I am able to move the market with my equity, then yes! But I cannot! All money managers say that their system is diversified. Let's study the term diversified and see what it involves. First what is diversification? To simplify, it's the act of putting your eggs in different places so that if an incident occurs at one place you loose 1 egg and not all of your eggs. In Forex, diversification means that you will be trading several pairs so that if one of them goes against you, the others will still have the opportunity to cover the loss.

Most traders do not understand the importance of correlation. Let's say I want to diversify my trades and I go long on EURO and POUND. Here, I am not diversifying because I am twice exposed to USD. That's not all, I am also exposed to 2 currencies that have a long history of being correlated. When the EURO goes up the POUND usually goes up too. Correlation come and go. Pairs that were correlated yesterday can experience a reverse correlation today. Pairs that are correlated during the Asian session can experience an inverted correlation during the European session.

That is why, you need to understand the concept of correlation of your money manager. Does he take correlation/exposure into consideration? How often his correlation are updated? I have developed a software that will give me live correlation ratios. I am sure there are a lot of them for free out there. They are rarely used by traders because rare are those who really see the importance of this concept.

Verify by all means available to you how the manager is trading. Ask him for additional documents if needed. Here's a story extracted from the "Black Swan": A Farmer provides food to a turkey on a daily basis. He does it the first day, then the second, 3rd, 4th ...... Due to confirmation bias, the turkey says to itself "Life is GOOD!" I don't have to find food nor a shelter. This Farmer gives me everything I need" The farmer did that for 99 days. Everybody would expect the farmer to do so on the day 100. But, the farmer had other plans. It was thanksgiving's day! This is a typical "black swan" event. Unpredictable, has great consequences (for the duck) and when looked at it after the fact, we will have the illusion that it was predictable.

Now, when choosing your money manager. Try your best to have all the information you can put your hand on. Try to see if he is using stop loss, averaging trades etc... See how you will be exposed to the black swan. It is really insignificant if you make 10% each month to get margin called a few months later. Also, you need to check how ready is the money manager fora black swan event in the markets... What is his exist strategy? How will he react? Did he survived the last crisis?

Watch out for managers that would recommend a broker!! I would understand a manager that requires you have a broker that supports a trading platform he is used to it. I would also understand a money manager that gives you specifics about the broker you should choose like low spread or low spread widening during news announcements. But, I am suspicious of a manager that recommends a specific broker. First thought that will come to my mind is that this manager will enter and exit positions as much as possible in a day to earn his commission. I don't say all managers do that, but watch out!

I hope that was helpful for you. Please comment so I know that I'm not talking to myself and will be encouraged to make other posts. Also,if you have questions or if you noticed anything I have missed let us all know.

PARADISE