The Power of Money Management

This thread is for those who do not know how to use proper money management with your trades. When I started trading I didn't know what was good money management besides from the crap that I read on internet from bogus sites. Until a few months ago I ran into this website where I now have my own personal mentor. My trading has completely turned around for the positive.

This post is for those with questions about good money management and also input from others on how you manage your accounts. Until a few months ago I didn't realize how important money management really is.

Then next post is going to be an article from his blog that he wrote last month that I basicly just wanted to share with anyone willing to read it because it has helped me so much.

I want to make it clear that this thread is for input purposes only. Everyone's opinion is encouraged but lets keep it clean. For instance, the next post from me is going to be an article from my mentors blog page from his website. If you do not agree with his money management that is fine but it doesn't mean it is wrong. It have saved me and I hope it helps others as well.

Below is the message from his blog page on money management


The Power of Money Management

August 4th, 2010 Hello everyone,
This email will concentrate on money management as I mentioned in the
email last night. This is one of my top 3 things you must obey in
order to succeed as a trader. At the end of this email you should see
the true power of money management and why all professional traders
use it. I will send out other separate emails for the other
requirements for succeeding.

I want to start by using our results from July with just over 100 pips
in profit. If you look at the profit in term of pips then we really
didn't make that much profit last month. Although, I would take 100
pips of profit over a loss any day. Losses will occur and there is no
way around it. If we have a month with a loss then we aim to make
those losses as small as possible.

When we look at the results last month we had several trades that had
1:2 Risk vs Reward and we had some that had 1:1 Risk vs Reward. For
those of you who have been following for some time you should know how
I feel about the RR (Risk vs Reward). I don't like to trade anything
less than a 1:2. I made a few trades this month with 1:1 because of
my buddy that made me aware of the trades he was taking that uses a
1:1 and actually is very successful. But very few traders are
successful trading 1:1 or less.

We lost 2 trades that had 1:1 RR last month. One of them were nearly
400 pips and another was 160 pip loss. That is almost 600 pips in 2
losing trades. The other trades all had 1:2 RR on them which is my
favorite because it allows you room to make mistakes and have more
losing trades. If you trade using a 1:1 then you must win 51% or more
of your trades to make a profit.

Below I am going to give examples of someone with a $1000 account
balance. One example is someone that does not use the percent rule
and uses .10 lots on every trade because they think that only $1.00
per pip with a $1000 account balance can't hurt them if they lose
trades. The other example is going to be someone that uses 2% risk on
any given trade using last months trades as our example.



Example 1 using .10 lots on all trades
Trade 1: Risk 50 / Reward 100 Won = $100 profit
Trade 2: Risk 50 / Reward 100 Lost = -$50 Loss
Trade 3: Risk 100 / Reward 200 Lost = -$100 Loss
Trade 4: Risk 50 / Reward 100 Won = $100 Profit
Trade 5: Risk 160 / Reward 160 Lost = -$160 Loss
Trade 6: Risk 50 / Reward 100 Won = $100 Pofit
Trade 7: Risk 400 / Reward 400 Lost = -$400 Loss
Trade 8: Risk 60 / Reward 120 Won = $120 Profit
Trade 9: Risk 25 / Reward 50 Won = $50 Profit
Trade 10: Risk 50 / Reward 100 Won = $100 Profit
Total = -$140 Loss

Example 2 using 2% risk on any given trade using the same Trades.
Trade 1: +4%
Trade 2: -2%
Trade 3: -2%
Trade 4: +4%
Trade 5: -2%
Trade 6: +4%
Trade 7: -2%
Trade 8: +4%
Trade 9: +4%
Trade 10: +4%
Total +16%

As you can see....example 1 trader lost $140 at the month end using
.10 lots on each trade. By doing this he lost $400 dollars on the
trade that had the 400 pips loss. And lost $160 on the trade that lost
160 pips. He lost 56% of his account on 2 trades while trader 2 only
lost 4% of his account on these 2 trades. Huge Huge difference
between the two. This is the reason why all professional traders
survive in this market. They look at there profits in terms of
percent gained rather than how many pips they made. There were more
trades than 10 last month but you get the idea.

The most common question I get when people first visit my website is
how many pips do I average per month. And that's okay because it is a
common question for most traders because most are not professional
traders. But if you train your mind to look at it in terms of profit
rather than pips then you will do much better.

How did I get the 4% profit above? Well if we are risking 2% on each
trade with a 1:2 RR then our profit is double on each trade. So that
would make a 4% profit on each winning trade. Since none of the
trades that were 1:1 won, we still only risked 2%.

A lot of traders ask me how did I learn to overcome the fear of
placing trades when I first started out. Well, it took a long time.
I have been trading for a long time but when I first started out was a
disaster. When I first started I was example 1. I didn't use the
percentage as my lot sizes and when I was nervous on every trade I
took because of I knew if I lost this trade then I would lose $75
because it had a 75 pip stop loss. I looked at it as only .10 lot
size and not the over all picture.

When I finally learned the hard way to use the percentage approach
then I was only risking $20 on any given trade because I used 2% or
$30 if I used 3%. This made it much more easier for me to enter
trades and took the fear and emotion out because I knew that if I lost
the trade then it was a very small amount. And if I won the trade
then I would make an easy $40-$60 on that trade. You will be amazed
on how much this will help your confidence in your trading. Not only
with your confidence but it will help a lot of you from closing out
trades to early which is a problem for most new traders.

Remember, you will not win all trades. In fact you will probably lose
most of them. But with good money management and a good RR and mix
that with more confidence and not afraid to pull the trigger will
change your trading completely.

Money management is an extremely powerful tool and if you use it
correctly will ultimately change your life as a trader.

When you open your charts for the day and you find that perfect trade
you think is a winning trade because everything lines up with your
strategy, but when it's time to pull the trigger and place that trade,
you second guess yourself and are afraid to actually enter the trade.
Do you have this feeling? This is the emotions taking over which is a
killer for most traders. They can't get over the stress of trading.
When you use good money management like I stated above, this will
nearly eliminate this fear over time. Because you can enter that
trade know that you only have a small amount at risk if the trade
doesn't go your way. You can enter a trade and go to bed without
losing sleep wondering if you lost most of your money or if you had
that big winner. If you are trading like this then I promise you, you
will not survive this market if you trade in fear with bad money
management.

I am going to give you a quick example on how to calculate good money
management on any given trade.

If you have a $1000 account balance and you enter a trade with a 100
pip stop loss and a 200 pip profit target. You don't want to enter
with .10 lots because that would be 10% of your entire account
balance. Instead, pick a percent that you are comfortable with. It
doesn't have to be 2% but I would suggest between 1-3% but an absolute
max of 5% for those who are more aggressive.

We will use a 3% risk in this example.
3% risk with a $1000 account balance is $30.00. So if you lose this
trade then you will only lose $30.00. Which is calculated by 1000 X
.03 = 30.00. You always take your account balance and Times it by the
% risk. That will give you the maximum risk. Now you take 30.00 /
100(Stop Loss) which = .30. This is not .3 lots because that would be
$3.00 per pip. This simply means we are going to use 30 cents per pip
which is .03 lots for a standard account. It would be .3 lots for a
mini account so you need to determine which type of account you have.

I am going to stop for now so if any of you have questions over
anything I went over please let us know. I am here any time and
Travis is also here to answer your emails.

For those of you who are using the Trade Copier EA, Alex does not have
the option to enter lot sizes by percentage yet so I would suggest you
pick your percentage and set the lot size based off your account
balance now and enter the lot size based off that with a max stop loss
of 50 pips. A lot of our trades will have only 20 pips or so but we
do have a max of 50. So I would use the highest case scenario to be
safe.

Regards
Micah

You've made a few mistakes.

In the first example, when you used fixed lots, you lost due to a single trade, the -400 pips trade. If you would have use your average stoploss, which is smaller than 100 you would have lost max 100 and your balance would have been at least +160$, therefore profitable. If you would have won that 400 pips trade, your balance would have been +660$. One extreme trade actually ruins your whole argument.

Let's look at the second example. You use 2% on every trade, regardless of your stoploss. In this case, your 400 pips trade has a smaller chance of losing compared with 100 pips but, because in your sample the 100 pips trades were winnings, you tend to think that the results are good because of the super money management you used instead of pure luck and random distribution.

One unusual trade weighted more in one example and less in the other. That's it. If it would have won, your argument would have been the opposite.

Anyway, to prove something about money management you need at least 1000 trades and the standard deviation of your stoplosses should be really small.

In the long run, using percentages instead of fixed lots is better for compounding and decreases the drawdown but the proof is very far away from your presentation.

PS. Tell your mentor that I teach money management techniques, he has a lot to learn.

WOW!!! I thought I made it clear in the first post that this thread is to post your strategy for money management and not to prove you are correct and everyone else is wrong.

You clearly did not read the entire post because while yes you are correct to a small portion, he does not have an average 100 pips stop loss as you try to change the theory. The 400 stop loss in the one trade above is the amount of risk on that particular trade as it clearly states he had 2 trades that had a 1:1 which he hardly ever does. But if you do risk that many pips to risk only a percentage of your equity which is just plain common sense.

The second post above is an example of how he trades....that's it...period. He is not claiming he is correct and everyone else is wrong. He teaches how he trades. He trades by only risking a percentage of his equity which is basicly what almost every professional trader does. A lot of his members to his site is there because they don't know how to use good money management and has blown there accounts. I was one of them until I joined his site.

By the way, he is an 8 year veteran trader not a rookie. Plus, the 1000 trades that you claim you need, he has well over that. I just posted one of them to show others what I have learned. And I have learned a lot which is why I am trying to give back to others on here.

Also, as you claim that using a percentage will overall reduce the risk and drawdown of your account....well duh what do you think the purpose of this thread is for.

As I have learned, using fixed lot size is good for traders that use fixed stop loss levels and fixed take profit levels. For instance, I use to trade where every trade had a 50 stop loss and a 100 pip take profit level. If I continued to trade this way then yes the percentage would not have changed if I profited or not. But when I take trade calls from this company that every trade is different then using the percentage rule is the best way for ME. I said ME because I do not know how everyone else trades. This is good for some and others it may not be. But that is what this thread is for. To post YOUR theory for money management.

From what I have seen you are only here to act like you are better than everyone but I have seen nothing that shows that you know what you are talking about. If you are not here to post your theories then simply stay out.

And if you really teach money management then I think you are the one that has a lot to learn because I have used this strategy for months now since I have joined with my mentor and for the first time in my life, I am finally profitable. I have been trading for a year now and I finally see the light due to this company.

wow. you need to settle the hell down. i think it is you who needs to re-read sauron's post.

you just completely lost all credibility by having a nice little tantrum there.

Tantrum....No I don't think so because I could care less what anyone else thinks. I am here to share with what I have learned over the last several months. But when someone comes in to say someone else is wrong and does not show there strategy to back it up then I have the right to defend it. I would never go into someone else's forum and say what they are doing is wrong by changing numbers around and not state my theories. That is not what this thread is about. The theories I have learned may not be for everyone but it is good for me. I was hoping others would share there's as well so everyone can feed off it. But apparently that is to difficult because everyone's egos get in the way. Either way, I am finally profitable by what I have learned and that is all that matters to me.

you need to have a lay down. you are so cut that someone pointed out mistakes. grow up.

Rhoward,

Great post....Many people I have taught to trade had a hard time at first grasping this concept, they wanted to make several hundred pips a week without understanding proper money mangement.

Thanks for posting.


-Mike

You didn't understand what I've explained. Your argument is completely flawed even if your mentor would be the most profitable trader alive. I know I'm right but unfortunately you don't know why you're wrong.

If anyone needs to know, fractional betting is the best money management. We wouldn't have crap topics about MM if everybody would understand this simple concept.

thehouse,
thanks for the post. I am no expert at this market as I have only been trading for about a year but from what I have learned, money management is so important to being successful at trading. I have learned the hard way.

Again, I am not here to argue who is right and who is wrong or who's way is better. This post is for everyone to list how YOU trade with money management so everyone can feed off it. So far, you have done nothing but try to tell me that I am wrong. But you have posted absolutely nothing on how you use money management. But to tell me that the way I use my money management is completely flawed is a joke. If that is true than you are saying that a lot of professional traders that have been around this market for years are wrong.

My mentor(s) from the company I signed up with has taught me how they trade. They have never told me they are right and everyone else is wrong. They simply teach me ways to reduce my risk as much as possible while capitalizing on as much profits when money management is mixed with good trading strategies. After joining there company as a client I have finally become profitable for the first time in my life. So how can that be flawed if I can finally say I am profitable. I have tried fractional betting as you call it and it didn't work for me. But that doesn't mean it is wrong because I don't like. Everyone is different just as everyone has different types of trading strategies. Some like to scalp and some like swing trading but that doesn't make one better than the other.

From what I have learned, I only risk 2% on all of my entries and I trade a strategy where I always go for a minimum of double the reward. My mentor doesn't guarantee I will be successful as a trader just because I use better money management but it helps me with my overall emotion knowing that i am not going to lose everyone on a single trade as I did before. When I first started out as a trader I would actually lose sleep at night because I was afraid of what my trade was doing an how much money I was losing. Now I have zero worries and sleep sound every night because of this money management. It works for ME. This is why I posted this thread in hopes of others would do the same. Post a strategy that works for YOU.

I simply risk 2% on all my trades and my profits are at least 4% on all trades. All this does is allows me to lose more than I win and still be profitable and also not risk too much of my account at the same time. I also am able to compound my winnings. Out of all the books I have read and all the videos I have listened to from professionals, all I hear is do not risk too much of your account and do not over trade. So this is not flawed in anyway.

I look forward to reading your post on how you use money management.