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.

Chris Farnworth is an independent Forex and Commodity trader with many years’ experience under his belt. He travels and works from around the world trading and writing content for various websites and blogs. In his spare time he enjoys scuba diving and surfing.

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