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Money Management (a great article for FOREX Beginners!)

  • #1
  • First Post: May 5, 2011 4:48am May 5, 2011 4:48am
Knowing how to manage your money is what differentiates a professional trader from an amateur. Money management skills are necessary for all kind of traders, no matter what tools they use to trade; whether trading via technical analysis, fundamental analysis, core trading etc. The ability to understand the meaning of opening a position with high leverage can prevent great loss.

The most important question that every trader should ask himself is what is the biggest loss he can afford per trade/day. Although there is no absolute answer to this question, it shouldn't be more than 3-5 percent of the account's balance. By limiting the max loss, you ensure that your account will survive longer in the market.FOR EXAMPLE: let's say that your balance is $10,000 and you set a limit of 3% of the balance per trade. According to that rule, you would have to close the trade when the PnL is $300. That means that if you opened a trade of 1 lot in the EUR-USD, it will take just 30 pips before you had to close the trade. Bottom line: Do not use high leverages - this will be discussed further in coming articles.
  • #2
  • May 5, 2011 9:45am May 5, 2011 9:45am
Quoting ChrisJMan
Knowing how to manage your money is what differentiates a professional trader from an amateur. Money management skills are necessary for all kind of traders, no matter what tools they use to trade; whether trading via technical analysis, fundamental analysis, core trading etc. The ability to understand the meaning of opening a position with high leverage can prevent great loss.

The most important question that every trader should ask himself is what is the biggest loss he can afford per trade/day. Although there is no absolute answer to this question,...
although money management is important, it is not the most important thing that differentiates an amateur from a professional. If my system is crap in the first place, no money management will save me. What differentiates an amateur from a professional is that the professional is exploiting an edge (inefficiency in the market), while the amateur is making random calls (even though not perceived as such).

And yes, there is an absolute answer to how much max drawdown one should experience per trade, if you base it on statistical analysis.

Other than that, I agree with the post.
  • #3
  • May 5, 2011 3:42pm May 5, 2011 3:42pm
Quoting Custos
although money management is important, it is not the most important thing that differentiates an amateur from a professional. If my system is crap in the first place, no money management will save me. What differentiates an amateur from a professional is that the professional is exploiting an edge (inefficiency in the market), while the amateur is making random calls (even though not perceived as such).

And yes, there is an absolute answer to how much max drawdown one should experience per trade, if you base it on statistical analysis.

Other...
But if your system wins 75% of the time that 25% may be the nail in the coffin for you. About two weeks ago i made returns of about 4.6% for the week my best week for the year so far. This week by far is the worst losing 2.11% if the week ended today. i still have my money and the profits i made.
not all week will be as bad as this and not all week will be as good as two weeks ago. But with money management i can have a slightly better chance of wining every week.
Best Regards Moneymike
  • #4
  • May 5, 2011 3:45pm May 5, 2011 3:45pm
Also my Money management goes something like this. I use Oanda since their's no lots I can truely use 1% of my balance, Leverage is 30:1. Stops are 50 pips or more behind SR. No take profits i take profits when the trend is over.
Best Regards Moneymike
  • #5
  • May 6, 2011 1:16am May 6, 2011 1:16am
Quoting moneymike
But if your system wins 75% of the time that 25% may be the nail in the coffin for you. About two weeks ago i made returns of about 4.6% for the week my best week for the year so far. This week by far is the worst losing 2.11% if the week ended today. i still have my money and the profits i made.
not all week will be as bad as this and not all week will be as good as two weeks ago. But with money management i can have a slightly better chance of wining every week.
yes, but first you need the positive expectancy system and then you can come up with proper money management, not the other way around.
  • #6
  • May 9, 2011 8:12pm May 9, 2011 8:12pm
Quoting Custos
What differentiates an amateur from a professional is that the professional is exploiting an edge (inefficiency in the market)
I'm fairly new to this, and can you give us an example of what you mean by above? Thanks.
  • #7
  • May 10, 2011 12:55am May 10, 2011 12:55am
Quoting CoolJL
I'm fairly new to this, and can you give us an example of what you mean by above? Thanks.
A classic inefficiency has been the difference in stock prices in different stock exchanges, which you could exploit through arbitrage. However, I think this kind of arbitrage doesn't work anymore.

So you gotta find the inefficiencies that still exist especially in the forex market.
  • #8
  • Edited 7:07pm Jun 4, 2011 6:48pm | Edited 7:07pm
the Money Management is very important, especially to people new to forex.
good Money mamagement could make you stay in this insdustrial for a longer time.and we all know that only experienced trader can win in forex.

but how to be a experienced trader ? stay in this market for enough time and lose money.

for forex beginners, they pay too much attention to find a high rate winning skill, 100% winning rate they want. but in honest, it is very difficult. and during this process, most of them know little about Money Managment, and blow up account soon.

so, if you are new to forex, the first thing you should learn is Money Management. Yes, Money Management could not give you a high winning rate, but Money Management could reduce your lose.

I think in forex, how to lose is much important than how to win. only you know how to lose, you could stay in forex for a longer time, and during this time, you could find the way to winning.
  • #9
  • Jan 15, 2012 7:11am Jan 15, 2012 7:11am
There are so many opinions on this topic but I think it's important to remember this fact. We are not here to make pips. We are here to make money. You need to ask yourself what is your risk per trade and that's what it is. I will give you an example. Let's say that you are trading with a $150 account(sorry for the low amount but this is unfortunately what many people are doing). IF you have defined your risk as 2%. This could be low. This could be high. It just depends on you. Anyways 2% is our risk in this example. That means that our total risk will be $3. So if your stop loss will be 10 pips (don't forget to figure the spread), then you just simply take 3(total risk) / 10(stop loss in pips). That means each pip should be worth $0.30. Now you just take your desired pip value and divide it by the value of a pip per lot. So if you have a standard account (100,000 units per lot/$10 per pip), then it will be 0.3 (desired pip value) / 10 (pip value for one full lot). Notice in this example that your result will be 0.03. So your order should be .03 lots. Now if you ever find that your desired order amount is less than the minimum, it means you need to find a broker that allows smaller order sizes. This will usually mean a mini or micro broker. As a rule of thumb I recommend $1000 acct size min for standard lot accts. $100 for min acct. $10 for micro. IF you have a $10 acct I think you should save up because you probably won't practice good mm and will lose it all anyways.
  • #10
  • Jan 15, 2012 2:51pm Jan 15, 2012 2:51pm
It may be a good idea if you can list a few specs, since it can help the newbies figure out how it works..
And you may want to start with some basic definitions..just a suggestion, happy trading!
  • #11
  • Jan 16, 2012 1:22am Jan 16, 2012 1:22am
Quoting Forexnuts
It may be a good idea if you can list a few specs, since it can help the newbies figure out how it works..
And you may want to start with some basic definitions..just a suggestion, happy trading!

I am still a newbie I think. I have only been at this for about 6 months. I understand the mm though. Here goes.

Account sizes.
You must know the lot size for your account. Typically it goes like this. When I say a currency unit it means of whatever the currency you are buying or selling. For example 100,000 eurusd=100,000 euros against the dollar. When I list value per pip, this is for usd based pairs(the right currency is usd). I just trade as if all pairs are usd based pairs. You can convert it if you want but it's extra work that averages out in the end. Here are standard lot sizes for different types of accounts.


standard=100,000 units=$10 a pip
mini=10,000 units=$1 a pip
micro=1,000 units=$0.10 a pip

These values are for full lots. In most cases you can buy as little as .01 lot so on a micro account you could have as little as $0.001 a pip. Use these values to make the calculations so that your risk per trade is no more than 2 or 3%. Here is an example below. It is extreme so you fresh newbies will know what to do.

2% risk
$15 micro account

2% of $15 is $0.30.
our stop loss + spread will be 88.
our desired value per pip calculation = $0.30 (total risk)/ 88(sl + spread) = .003
lots for order = .003(desired value per pip) / 0.1 (value per pip on a full lot) = 0.03

so we will place our order for 0.03 lots and if our stop loss gets hit we will lose $0.30 which is only 2% of our account. I am telling you guys that this is the secret (it's not such a big secret really) of winning traders. If you are a loser, so you will lose your money slower. If you are a winner then you will weather the bad streaks and come out as a profitable trader over time. IF you don't apply some sort of mm strategy then it's a sure path to account blow up. Take it from someone who has never blown up an account because he always funded it in time. Take it from someone who has had too many margin calls to count. You MUST use MM. There is no other way
  • #12
  • Jan 17, 2012 3:31am Jan 17, 2012 3:31am
Quoting bfis108137
I am still a newbie I think. I have only been at this for about 6 months. I understand the mm though. Here goes.

Account sizes.
You must know the lot size for your account. Typically it goes like this. When I say a currency unit it means of whatever the currency you are buying or selling. For example 100,000 eurusd=100,000 euros against the dollar. When I list value per pip, this is for usd based pairs(the right currency is usd). I just trade as if all pairs are usd based pairs. You can convert it if you want but it's extra work that averages...

As this is my first post (attempting to gain full memebership etc), it probably doesnt mean much for me to say that I appreciate this post a lot.

I am very new to trading but I do understand the fundamentals of money management. I am currently using a demo account as I do not feel I have the confidence/skills (yet) to make consistently higher profits than losses as yet, but over a month on my demo I have come leaps and bounds.

As a person who would also start out with a small amount of capital in a live account, my primary concern is managing my losses. On my demo account currently, I place trades that I would only be able to do on my live account, ie keeping margins small and within 2-3% of my capital, this is so I get used to the trade execution and also become accustomed to the maths behind the profits/losses.

Sam
  • #13
  • Jan 17, 2012 4:46am Jan 17, 2012 4:46am
Quoting MrBurns
As this is my first post (attempting to gain full memebership etc), it probably doesnt mean much for me to say that I appreciate this post a lot.

I am very new to trading but I do understand the fundamentals of money management. I am currently using a demo account as I do not feel I have the confidence/skills (yet) to make consistently higher profits than losses as yet, but over a month on my demo I have come leaps and bounds.

As a person who would also start out with a small amount of capital in a live account, my primary concern is managing...
Hi,

Setting SL and TP orders is the first thing you do to manage your losses!
If you set it right e.g. 1:4 ratio than you can take 4 bad decision and 1 good when opening a position, and still be on zero! But don't be greedy!

Also to minimise loss apart from the above you can do position building!
e.g.: when the trend changes open a position with 0.01 lot then when you see the trend continuing (depending on the timescale you trade in) open another position with 0.1 lot and if the market still going to the same direction open 1 lot etc.
ALWAYS set Stop Loss but the TP can be left out and close manually if you are in front of the scren.

But this is only my experinece! A single strategy may not suit everyone. Everyone has different!

I hope it was helpful.
If you have any questions don't hesitate I'll try my best to answer!
  • #14
  • Jan 17, 2012 7:29am Jan 17, 2012 7:29am
Quoting ZoltanNemeth
Hi,

Setting SL and TP orders is the first thing you do to manage your losses!
If you set it right e.g. 1:4 ratio than you can take 4 bad decision and 1 good when opening a position, and still be on zero! But don't be greedy!

Also to minimise loss apart from the above you can do position building!
e.g.: when the trend changes open a position with 0.01 lot then when you see the trend continuing (depending on the timescale you trade in) open another position with 0.1 lot and if the market still going to the same direction open 1 lot etc.
ALWAYS...
Thank you for your quick input, I completely understand what you have explained here, so thats good on my part, as i am still learning the fundametals and different strategies. So again, thank you very much, I have floated round some other forums and some of the responses have been quite blunt.

I have a 9-5 job (UK based) but as I am committed to my "studies" and learning this industry as best i can, I spend the majority of my spare time, reading new books (just finished "Technical Analysis - For Dummies", just started "Day Trading - For Dummies"), watching online Youtube Vids (one who I really enjoy watching as I like his teaching style an the way he exlplains things - I would name drop but im not sure if I can mention them as they offer a mentoring package for $$), and I have a demo account on GKFX Metatrader4 to practice on.

So all in all, i do have a lot of spare time to dedicate to learning new skills and strategies while at home during my evenings and weekends.

This isnt just a quick buck for me, I enjoy learning about the reasons that markets move, what affects price, how large volume trades can affect the market movements etc, this is my thing, I really enjoy it. However, I do also wish to make some money from this also, but I do understand that there is a long road ahead starting from my first deposit to the ferrari

Cheers

Sam
  • #15
  • Jan 17, 2012 2:58pm Jan 17, 2012 2:58pm
Great exp, simple enough for the newbies to get an idea of what it is all about. That's it guys - the bare basics of MM. And yes, try it out with the demo and you'll get better when you open a live account.
FYI, everyone has their own unique MM strategy whether it is 4:1 or something else, but the golden rule: never get greedy!
  • #16
  • Jan 18, 2012 12:36am Jan 18, 2012 12:36am
Also if anyone starts from zero and want's to learn I highly recommend the:
www.babypips.com/school

website.

In the same time try demo.

I offer free training but only for serious people.
More info in Private Message.
  • #17
  • Jan 20, 2012 8:01am Jan 20, 2012 8:01am
Don't Bet The Farm If You Want To Be Profitable Long Term

As Murphy's law will have it each and every time, the moment when you feel the most confident about your system is the point where your system has the most chances of having a string of losses. If you invest a big sum at this point, you risk catching that streak and losing a lot of money that you can't afford to lose. Moreover, you will be less inclined to ride out the losses because now you're afraid of the consequences of losing this money. Fear will take over, and there's nothing worse than fear to kill a profitable Forex trading system. You'll start second guessing trades, shut down your system at the worst possible time, and potentially even give up on a perfectly profitable Forex trading system prematurely.

The Best Forex Money Management Strategy

Instead of adopting an all or nothing approach, there is a solid way of increasing your capital and your profits without betting the farm, and that's by progressive reinvestments and allowing your profits to compound. Progressive reinvestment means that you consistently add a fixed amount of new capital into your trading account each month, which means that you're less likely to be affected by an "unlucky" streak because of the law of averages. As you grow your capital, you will grow your profits as well, and that's where reinvesting your profits comes in.

At the start, when your capital base is small, your profits will hardly be worth withdrawing from your account. You're much better off leaving your Forex trading profits in there to compound, so that they will birth more profits in the following months. I'm sure you know the power behind compounding, and because Forex trading profits are typically much higher than standard investment vehicles, you'll have much more accelerated compounding happening for you. With the reinvestments and compounding working together, you'll achieve your Forex financial freedom goal in no time!

Patience is a virtue, and nowhere is that more true than in Forex. Your capital is by far your most precious commodity, and you owe it to yourself to stay safe in the market so that you can capture your profitable Forex trading systems full potential. So don't get impatient and risk more money than you can afford to lose, but instead stay in the game and let the best Forex money management strategy work its magic for you.
  • #18
  • Dec 17, 2020 7:25am Dec 17, 2020 7:25am
Very good article. Irt will help all the new traders to make their decisions easily and also help to make a good money management strategy.
  • #19
  • Last Post: Dec 17, 2020 9:57am Dec 17, 2020 9:57am
Money management is the backbone of the trading discipline. It is not possible to develop a trading investment without following money management. As a trader, I always try to maintain money management.
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