Hi folks,
Here's a nice little money management system I came up with for scalping.
By the way, when I say "scalping", it doesn't have to be a 30 second trade.
I really mean any trade off the 15M chart or less.
I found one problem with scalping is that you can
A) quickly gain pips but just as quickly lose them back
B) quickly lose a large number of trades
C) easily overtrade
I have found that once I got into a scalping mode, the tendency
was to take more and more trades, either pushing for more pips,
or trying to win back lost pips. Either way, I was making like
60 trades a week!
Think about this: If your spread is 2 pips on average, you are
paying 120 pips a week or 480 pips in a month, just in the spread!
There needs to be a way to manage this, so you do not
overtrade your account.
So, here's the money management system:
1. Create a seperate account or subaccount just for your scalp trades.
2. Only scalp pairs with LOW spread (EUR/USD and USD/JPY come to mind)
3. Choose a proper risk factor. You can go with 20 pips = 1% of your account, or if you want to be agressive, 10 pips = 1% of your account.
4. You can trade 2 sessions a day. For each session, stop trading
after you make 20 pips or you lose 30 pips.
5. Keep your SL to 15 pips max including spread. The stops must be
at the right technical levels. If you cannot take the trade because
the SL would be too large, you can skip the trade or wait for
price to go the wrong way so the SL is narrowed. If it still looks
like a good trade with smaller SL, go for it.
By keeping your SL to 15 pips max, you will get 2 chances before
your maximum loss of 30 pips is hit.
THIS FORCES YOU TO CHOOSE YOUR TRADES WISELY. Often,
we can have the mindset, oh i'll just take this trade and if
it doesn't work out, i'll win the next one. No...
This forces you to start winning right away because you know
if you lose right off the bat , you are done for the day.
6. When you hit your 20 pips, you are also done. This stops
you from getting greedy and taking more trades that
aren't the best. Of course, if you are in a trade, you do not
close it early because you are at 20 pips.
For example, if you are up 15 pips and take a trade , you can
close it at 10 pips profit for a total of 25. But after that, you stop.
7. IF you are profitable, you can do another session later
in the day (wait at least 2 hours) and go for another 20 pips.
If you lost, you limit yourself to just that 1 losing session and
you do not trade until the next day.
Again, the purpose of these rules is to control how much you can lose
in one day, to limit the number of trades you're doing, but more importantly, to stop yourself from trading on emotions.
8. So, assuming you are going with the agressive plan of 10 pips = 1%,
you can make 4% in a day max, or lose 3% in a day. If you win 4%
3 days out of the week and lose 3% 2 days out of the week,
you are up 6% for the week and this will make you rich if you
can do it consistently.
9. Do not trade on Sunday night. Not enough price action to establish S/R and make smart trades. Wait till at least London open or NY open on monday morning.
10. Adjust your trade size from week to week. Remember, the most
you can lose in a week is 15% of your account. That's the worst
case scenario. If that happens, then the next week you should
adjust the size of your trades so 10 pips is still 1%. Brokers
that allow any size trade are great for this purpose.
Similarly, if you gain 20% in a week (the max), adjust your size
of your trades so 1% = 10 pips.
This way, you are simultaneously taking advantage of compounding
while limiting your risk.
Please let me know what you think of this system.
Here's a nice little money management system I came up with for scalping.
By the way, when I say "scalping", it doesn't have to be a 30 second trade.
I really mean any trade off the 15M chart or less.
I found one problem with scalping is that you can
A) quickly gain pips but just as quickly lose them back
B) quickly lose a large number of trades
C) easily overtrade
I have found that once I got into a scalping mode, the tendency
was to take more and more trades, either pushing for more pips,
or trying to win back lost pips. Either way, I was making like
60 trades a week!
Think about this: If your spread is 2 pips on average, you are
paying 120 pips a week or 480 pips in a month, just in the spread!
There needs to be a way to manage this, so you do not
overtrade your account.
So, here's the money management system:
1. Create a seperate account or subaccount just for your scalp trades.
2. Only scalp pairs with LOW spread (EUR/USD and USD/JPY come to mind)
3. Choose a proper risk factor. You can go with 20 pips = 1% of your account, or if you want to be agressive, 10 pips = 1% of your account.
4. You can trade 2 sessions a day. For each session, stop trading
after you make 20 pips or you lose 30 pips.
5. Keep your SL to 15 pips max including spread. The stops must be
at the right technical levels. If you cannot take the trade because
the SL would be too large, you can skip the trade or wait for
price to go the wrong way so the SL is narrowed. If it still looks
like a good trade with smaller SL, go for it.
By keeping your SL to 15 pips max, you will get 2 chances before
your maximum loss of 30 pips is hit.
THIS FORCES YOU TO CHOOSE YOUR TRADES WISELY. Often,
we can have the mindset, oh i'll just take this trade and if
it doesn't work out, i'll win the next one. No...
This forces you to start winning right away because you know
if you lose right off the bat , you are done for the day.
6. When you hit your 20 pips, you are also done. This stops
you from getting greedy and taking more trades that
aren't the best. Of course, if you are in a trade, you do not
close it early because you are at 20 pips.
For example, if you are up 15 pips and take a trade , you can
close it at 10 pips profit for a total of 25. But after that, you stop.
7. IF you are profitable, you can do another session later
in the day (wait at least 2 hours) and go for another 20 pips.
If you lost, you limit yourself to just that 1 losing session and
you do not trade until the next day.
Again, the purpose of these rules is to control how much you can lose
in one day, to limit the number of trades you're doing, but more importantly, to stop yourself from trading on emotions.
8. So, assuming you are going with the agressive plan of 10 pips = 1%,
you can make 4% in a day max, or lose 3% in a day. If you win 4%
3 days out of the week and lose 3% 2 days out of the week,
you are up 6% for the week and this will make you rich if you
can do it consistently.
9. Do not trade on Sunday night. Not enough price action to establish S/R and make smart trades. Wait till at least London open or NY open on monday morning.
10. Adjust your trade size from week to week. Remember, the most
you can lose in a week is 15% of your account. That's the worst
case scenario. If that happens, then the next week you should
adjust the size of your trades so 10 pips is still 1%. Brokers
that allow any size trade are great for this purpose.
Similarly, if you gain 20% in a week (the max), adjust your size
of your trades so 1% = 10 pips.
This way, you are simultaneously taking advantage of compounding
while limiting your risk.
Please let me know what you think of this system.
