Forex Money Management : A New Approach
Have you come across a trader who reported a large amount of profit from a relatively small account? Such stories are wide spread and often attract inexperienced trader’s attention. In this 4 part article we will explore into traders mind and psychology plus look into ways of money management in Forex the right way.
Was it a Fluke? Perhaps just a stroke of luck. Anyone claiming outstanding gains overnight is probably exposing his trading account to enormous risk by trade large number of lots. It is only matter of time before huge losses would wipe out gains and beyond, leaving trader feel devastated financially and emotionally. Trust me, I know that from personal experience. Money management in Forex Trading is a combination of specialized techniques and your trading judgment. Lets look further into it.
Calculating Right Trade Size / Lot:
Overexposing or underexposing your account can change the end result drastically and hence the first thing we need to do is to come up with the right size for our trades. Also remember that this is not a one time process, in fact it is an ongoing process because variables like account size, stop loss and pip value keep changing with time.
Before we can even look into the formula for successfully calculating the right trade size we need to agree one very important thing, Risk. So what should be the ideal risk per trade? Answer to this question would depend on the trader however most successful traders would recommend 2-3%. In my personal opinion you should not risk more than 3% per Pair Category. You can read up further on Trade Category here: Risk Management
Once you have made up your mind about the Risk % then calculate Risk in Dollars by multiplying the account size by Risk %. For Example if you have $10,000 account and willing to risk 3% then total risk in dollars is $300 ({10,000 x 3} / 100).
Forex Money Management
Forex Money Management
Next step is to determine the Stop Loss. Whatever trading system you are using, you would know by now what is your Stop Loss. Lets say for the sake of this exercise your Stop Loss is 100 pips. The next important factor is to determine Pip Value of the pair your are about to trade. The easiest way to find out is to look at your brokers trading platform. Look at the attached screenshots from MBT and FXCM trading Platform. MBT represents Pip Value/Lot for a Mini Lot under their Watchlist or Position window and FXCM calls it Pip Cost under Simple Trading Rates window represented for a Standard Lot.
Money Management Forex
In the example I’ve used MBT Pip Value as 1 resulting in Trade Size in Mini Lots. If you use FXCM Pip Value then the result would be in Standard Lots. Also keep in mind that resulting Trade Size may not come out as whole number and may be a fraction. In that case always go down to whole number and never go up. For Example, If the resulting Trade Size is 2.32 Mini Lots then make it 2 Mini Lots and not 3. Some broker may let you trade fractional lot sizes and in that case you won’t need to worry about it.
In this article so far we have only touched the surface of what money management in Forex is all about.
Awesome post. Its really a nice and informative post i have seen. Actually I am new to forex trading. so this post is surely going to help me in my forex trading. Thanks again, for this post.
Through your provided steps any trader will do forex trading management in systematic way.
Risk control is one of the most important aspects of survival. Your description is right on, it will help traders understand the principles.
Many traders make the mistake of trading too big, all or nothing. The first priority is survival, profits come after that.
The formula is quite simple, but imagine if you're dealing with tens of different currencies, how would you compute its trade size on say, a daily basis? All this can of course be answered with automation and using robots.
–Rosela
I have a chart made out each day based on the account balance to determine lot sizes to trade based on risk. I trade 1% per pair. here is the formulae (Spread+ stop loss) = (Account X %risked)/( 1000 x lots) ie for today (5400 x1)/(1000 x lot) = 5.4/lots , so i write a paper with 0.01 to 0.15 and calculate the pip value, ie 0.01 lot is 540 pips – so any stop loss > 540 pips i don't trade, 0.02 give 270, so from 271-540 it's 0.01 lot, 270-181 0.02, 181-131 0.03, 130-104 0.04 etc , that way i can more quickly enter trades . You could also use available equity too instead of balance.- hope this is of some use in MM
I realise this doesn't take account of differing pip values, but it's close enough for me (as i'm working at 1%) – Oandas platform can automatically trade a fixed % based on stop loss – and you can trade pico lots there ie 0.000 01 of a lot (ie $1) amounts are calculated to 0.0001c and you get interest on the non traded part of your account, as well as second-by-second interest on the trading bit. – off my soapbox now .
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