Money Management Simple guideline
Forex Money Managemet simple Rules
Submit by James UK 19/07/2013
Money management is extremely important to being a successful trader.
Without it, you will rarely succeed in the long run. With your paid subscription, we will give our traders specific guidelines that should be followed according to their account balance.
As a rule of thumb, it is generally a good guideline to never trade more than 10% of your account capital.
When in a trade, you should never risk to lose more than 5 to 8% (absolute maximum) of your account capital on one trade. That's saying, if your account is $ 25,000.00 and your margin is $ 500.00 per lot, you would not want to trade more than $ 2500.00 (10% of account capital), or 5 lots.
This means you could have 5 lots of the $/JPY and have your stop/loss set at 35 points. If the trade went against you and you were stopped out, you would lose approximately $ 1662.00 (6.6% of capital) if the rate per pip was $ 9.50 This would meet the criteria of the above guidelines.
Trading with this formula in place will keep you from risking too much on one trade and thereby protect your capital and keep you actively trading. It's imperative to have a good system but if you have nothing to trade with, it's pointless.
There is no system or trader in the world who doesn't have losses.
"professional" and profitable traders are right only about 50% of the time yet highly profitable. This is made possible because of strict money management and avoiding excessive risk.
Proper money management should address three things: Risk and reward and the overall efficiency of the system (as opposed to a per trade efficiency ie stop loss - protection).
Money management is something that pertains to your margin account as a whole and is not gauged on a per trade basis.
Contrary to popular belief futures trading is not gambling. For example in a casino, risk is artificially manufactured and engineered in favour of the house. In futures markets we are dealing with natural risk associated with the production and consumption of the materials that make life possible and worthwhile - food, metals, finance and energy products.
The trader decides what he is going to trade based on back testing the system on the securities
or commodities that he wants to trade. He then has a positive expectation based on this historical testing.
We cannot bend those risks to our will but we do have tools to manage them. Unlike gambling I believe we can move the odds to our favour. To do this we must be disciplined and have a predetermined
plan. Read more . . . There are other money management methods out there and they are lumped into some categories.
Larry Williams money management formula
Larry Williams money management formula: (account balance *risk percent) /largest loss = contracts or shares to trade.
Larry said: “There are probably better and more sophisticated approaches, but for run-of-the-mill traders like us, not blessed with a deep understanding of math, this is the best I know of. The beauty of it is that you can tailor it to your risk/reward personality. If you are Tommy Timid, use 5 percent of your bank;should you think you are Normal Norma, use 10 percent to 12 percent; if you are Leveraged Larry, use from 15 percent to 18 percent; and if you are Swashbuckling Sam or Dangerous Danielle, use in excess of 20 per cent of your account ... and go to church regularly.