Money Management. How to make money using any Forex strategy.

The Money Management in Forex trading, is one of the most important things you should know, for a profitable trading activity. Yet this isn’t always on the front page of the courses, books, etc. By understanding it right, you will learn how to make money using any strategy. There are lots of ways to use the Money Management in your favor. The problem, for many traders, beginners or not, is how to stick to it.
 

“Never risk more than 2% per trade”

 
This means you can take 50 negative trades in a row, before losing all your account balance. That of course, if you don’t adjust this 2% risk per trade, at your actual account balance, after each negative position.
 

“Never invest more than 30% from your account balance”

 
This means all your opened positions, in the same time, shouldn’t use more than 30% of your account balance.

Having a good Money Management is the key for successful trading. A good Money Management system, it allows you to maximize the benefits and minimize losses. That’s why, for the beginners, I would recommend a risk of 1% per trade and max investment/trades = 10-15%. This will not make you rich faster, but it will give you the chance to grow constantly.

Money Management for the real trading accounts is completely different than the Money Management for the Demo Contests accounts, where you must use a much higher exposure and a much higher risk per trade, to be in the top 10 – but still, you must stick to your Money Management, from the beginning to the end of the contest.
 

“Market goes up or down. So, you have 50/50 chances to be right, all the time!”

 
Trading is about the highest probability trades. By opening a position, buy or sell, on any financial instrument, you have 50% chances to be right. Price can go either up or down per swings, even if the swings might have the same highs and the same lows, as the previous ones, like we have on a range market. Because of this, you need a strategy, that will increase your chances to be right. Here is the catch: many people think of it and search for the “holly grail” of trading. The problem is that they never quit searching for it and they become “testers” of all the possible strategies around the web. And the lack of patience for testing it properly, on demo, makes them testing it on real account, later on, when their initial strategy fail them.

Finding a good strategy might take you time, but it’s either you have time, for testing it properly on a demo account, or you have money to lose, to find it. Sometimes, you don’t have time for testing and you don’t have money…to lose, either. And after first loses, you start to “search” for a new strategy that might make you rich. That’s one of the most common mistakes, that will make you blow, one account after another…

After my first 2-3 years, while searching and testing all the possible strategies, around the web, I found out, that is useless to search for a “better strategy”. That’s why I always said, that any mistake you made, I’ve done it myself. But experience comes with taking bad choices, right? And I found out on the hard way, that the secret for a profitable trading activity is related to the Money Management system and the Risk/Reward ratio. And of course, later on it’s about the Open Positions Management and the Personal Life Money Management.
 

Strategy Statistic and Risk Reward ratio

 
Let’s have an example of good Money Management and a very bad strategy with just 3/10 trades in profit (yes, a very very bad strategy):

– 7 negative trades (7 SLs hit)
– 3 profitable trades (3 TPs hit)

But we will use a R:R = 1:3 (TP = 3xSL or SL = 1/3 TP). Lets say your Money Management Rules allows you a SL=30p. That means your TP should be at least 3xSL. So the TP=90p.

– 7 negative trades (7 SLs hit) = 7 trades x 30p loss = -210p
– 3 profitable trades (3 TPs hit) = 3 trades x 90p profit = +270p

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TOTAL: 10 trades (3 positive and 7 negative ones) = 270p-210p = +60p

Can you imagine now a strategy with at least 7/10 trades in profit? Can you imagine what means using it, with strict Money Management Rules and a R:R of 1:5 or 1:8, by using the Harmonic Patterns and Open Positions Management? Not to mention that, by using it on Multi time frame, your TP could reach up to 20xSL by shifting your initial SL in profit, while keeping your initial TP level, from higher time frame.

Lets see the math using the same Money Management Rules example with SL=30p and TP=3xSL=90p:

– 3 negative trades (3 SLs hit) = 3 trades x 30p loss = -90p
– 7 profitable trades (7 TPs hit) = 7 trades x 90p profit = +630p

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TOTAL: 10 trades (7 positive and 3 negative ones) = 630p-90p = +540p

Hope now is clear for everyone, that your Money Management Rules must be nailed on your wall, on your monitor and the most important, in your head. And if you trust your strategy and you keep the same data for your Money Management, while trading it, you should be in profit.
 

Most of the strategies fail on the long run!

 
But, do you trust your strategy? Did you made the demo strategy statistic yourself? Or you just use a strategy because someone claim it’s a 7/10 profitable trades strategy?

Considering other people statistic is not enough, for me. So, I like to test it on 100 trades, not just 10. Therefore, my demo statistic, could be: 70/100 trades in profit, for example. Why? Because I need to see it on a long run and because the math behind it, must show me if the “chances” are proven facts. Not just lucky trades, in the beginning of tests.
 

“Never put all your eggs, on the same basket! Portfolio trading”

 
I started as a stocks trader, like most of you. Probably I got the idea of a portfolio, from there. But guess what? It works here, as well. So instead of trading 1 full lot (1.0 lots) of any financial instrument or pair, why not use 10 x mini lots? (0.1 lots/pair). The same thing if you are using mini lots. You can divide it into micro-lots (0.01 lots) and trade a portfolio of multi pairs.

This will offer you a better risk dispersion for your trading activity. And will decrease the testing time for your strategy statistic, as well. Specially, if you are a swing trader like me. You won’t have to wait 100 closed positions for the same financial instrument, anymore. You can have 10 trading sessions (of few days each) x 10 closed positions/session (portfolio)
 

Rules, rules and…rules

 
We all know, trading is about emotions control. To control our emotions, we need rules. And we must stick to it, no matter what. In this way it will become our second nature. It will be easier to apply it, automatically, later on. Without it, when testing 7/10 strategy, that will give you 5 consecutive loses, will make you stop trading it and you will start to use another one. But what if the math was right, and you will see it as 70/100 trades, eventually? That means you must be there for 30 losing trades…why stop using it after just…5 negative results, consecutive or not?

Of course you should use the Money Management Rules and:

1. You must know, your SL and TP.
2. If your account reach -30% from initial balance, you should stop trading and go demo again!
3. Don’t come back to real, until you’ll find out, what went wrong!
4. Refill your account (you always need back up money – Personal Life Money Management)
5. Keep the same rules and double your initial trading lots ONLY if your account is doubled, as well!

So, if your limit of loss is 30% from your initial account balance, that must be the bottom line. You just need a system that will allow you as many possible consecutive loses, before reaching this level. If your Money Management system allows you just 10 negative positions until this limit, not even the best strategy in the world, can’t give you profits, on the long run! Or, if you had profits 1 month, in this way, it means you are just…lucky. And in Forex trading, we don’t count on luck. We count on the highest probability setups and mathematical chances.

Ice.

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