My money managements rules
Not in any particular order
Daily capital risk = 2% - not to be confused with 2% risk per trade. A huge mistake.Will split trades in two 1%(risk) trades. That way, You’ll have two chances for trading.
Optimum risk/reward – 2:1.
If you make 2:1 – please stop trading.
If you lose 2% - just stop trading, there’s nothing more for you.
Here’s the most likely outcome(s) if you follow these rules.
A: You place a trade, looking for 2:1 with a 1% risk. 2:I is feasible, market moves on your side. Your target is hit, You close the charts and go do whatever.
B: You place a trade looking for a 2:1 with a 1 % risk. 2:1 is feasible, market moves against you(stopped out).
You look for the next opportunity (still have 1% more to play)
C: You place a trade looking for a 2:1 with a 1 % risk. 2:1 is feasible, market moves against you. AGAIN!! You close the charts and go do whatever…2% daily risk limit has been reached.
OR
A: You place a trade looking for a 2:1 with a 1 % risk. 2:1 is feasible, market moves against you.You look for the next opportunity (still have 1% more to play)
B: You place a trade, looking for 2:1 with a 1% risk. 2:I is feasible, market moves on your side. Your target is hit, You close the charts and go do whatever
Why don’t go for a third round???
In my screw-ups, I did that third round many times. I don’t know, maybe is attached to the law of probabilities or something. But trust me on this one. If you did the math, you have 1% in your pocket. Do yourself a favor and don’t go for more.
If you lose one ride (1%) and it’s like 2-5 PM and nothing else happens, don’t feel guilty. Just think that you put at risk 1% of your capital (which is ˝ of your allowed daily risk) in order to get double. Please wrap it up. The market will be there tomorrow, trust me. If it’s Friday, unless a holiday on Monday, the market will be there next week.
OR
Any of the outcomes laid out before with the addition of moving stops/targets.
In this one, be prepared to be screwed over the long run.
1:1 Risk/Reward
Simply as: If you get a 1:1…go for the next round. If nothing happens afterwards,
close the charts. Be happy.
Same daily 2% rules apply.
Ok, here’s the question many are looking for:
How do I know if 2:1 is feasible??
Keep reading.
Common Sense
It’s important to know the daily range average of the pair you’re willing to trade.On EUR/USD for instance, a ballpark figure could be anywhere for 60-100 pips.
If you have a stop-loss around 80-100 pips distance, you know already that’s not a normal situation on the pair. Imagine 80 pips on a 2:1 - I’ll be 160 pips.
If your stop is something easy like 20 pips, well you know 2:1 is quite possible.
I really don’t have a hard and fast rule on this one. Making one is a waste of precious time. You need to think how far this particular pair could stretch out on the time frame you’re trading. Like if you’re trading London/NY session, you know that the pair will normally run the average mile. If you’re on Asia session trading any USD pairs, the range is less.
Load adjustment
The load (# of lots) must be adjusted so you risk the same amount of % capital no matter how far-distant your stop is. You’ll have more flexibility using mini-lots.If you’re planning to go off-balance, be warned that you’ll make less money than 1:1 or better trade. My suggestion is to take these trades off the 2% rule and lower your load to the point you won’t feel guilty if you lose.
In this particular case above(off balance), instead of measuring the trade by % capital risk, use dollar figures. I personally go like “well I am gonna risk 50 bucks on this one” If you lose, just take it off the 2% daily risk. Either if you win or lose, still you can shoot for more, if it’s possible. My mentor called this trades “Pizza Party” trades.
These rules is what keeps my head above the water. They’re to me very much like a code and I won’t change it for nothing. I prefer not to trade if I feel temped to tweak this rules for any reason.
I have reviewed this document and I hope haven’t miss anything, as I play these rules by memory after many years. If I did, I’ll make an “amendment” LOL.
I am profitable because I combine both my system(s) and my Money Management Rules. If you start adding/taking stuff off the rules, I assure you with all my heart, you’ll get screwed in the long run.
I sincerely hope you all can benefit from it.
Good Karma.
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